Foreign capital inflows to the USA and mortgage interest rates

Abstract

This study explores the impacts of foreign capital inflows on the USA mortgage interest rates. I find evidence that foreign capital flows are significantly and negatively related to 30-year mortgage interest rates. The evidence on the extent of the responsiveness of the interest rates to the foreign capital inflows depends on the type and magnitude of the capital inflows. Official capital flows to the Treasury and agency bonds do appear to have a significant influence on the mortgage interest rates in the VAR model specifications. Private capital inflows to the US agency bonds have significant impact on the long term mortgage rates. Private capital inflows to agency bonds do not significantly and consistently affect mortgage interest rates and Treasury yields. The relatively weaker importance of the private inflows in influencing the rates may be due to its smaller size compared with the official inflows. The results are robust for alternative model specifications.