The large and continuing purchases of U.S. securities by foreign investors, primarily Asian investors, have had a powerful and beneficial impact on the U.S. housing market, according to a study released today by the Mortgage Bankers Association. The study found that international demand for US debt had a material effect in lowering overall interest rates and that the Chinese demand for mortgage-related debt lowered US mortgage rates by approximately half of a percentage point. The study found that almost 45 percent of all U.S. Treasury securities and more than 20 percent of all U.S. Agency securities (bonds and MBS) are currently held by foreign investors. “It might seem farfetched as a story, let alone as sound economics, but the truth appears to be that U.S. mortgage borrowers have been a primary beneficiary of China’s decision to move a large part of its population from rural agriculture to urban manufacturing through export-driven growth, with the U.S. as a major market. The connection is that the need to maintain a somewhat undervalued Chinese yuan has caused China to make extensive investments in U.S. Treasury and Agency securities, with the likely result that U.S. mortgage rates have been at least 50 basis points lower; indeed a case could be made that U.S. mortgage rates are a full percentage point lower as a result,â€? said Bardhan and Jaffee. The study’s authors also note that an undervalued yuan has been one of the policies adopted by the Chinese government to maintain a high level and growth of exports. This policy, they argue, necessarily creates a large trade surplus with the U.S. — which in turn necessarily creates the need to invest the resulting dollar inflows in U.S. dollar or other assets, in order to maintain an overvalued dollar. Click here to read the full study.

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