Pressure 02 · Inflation
When inflation rises, who adds pressure and who absorbs it?
The identified cost-push shock reduces foreign official demand and increases Fed demand. These opposing portfolio responses shape the 10-year yield response.
Yield decomposition
Foreign official demand and Fed demand move in opposite directions.
A one-standard-deviation identified cost-push shock comes with changes in inflation, the policy rate, activity, debt relative to GDP, and the supply of other safe assets. Investors respond differently to this joint macroeconomic disturbance. The results shown here average the response over the first year.
At the 10-year maturity, lower foreign official demand adds pressure. The Fed’s estimated demand response moves in the opposite direction. The full model yield response reflects the balance of these channels and the rest of the market.
What the decomposition measures
The components attribute the yield response to estimated inflation loadings for foreign official investors and the Fed. Neither component removes the sector from the market.
10-year yield response
Model-implied attributionSelect a step, then read the bars from left to right. Each bar begins where the preceding bar ends.
The Fed demand response offsets part of the pressure. Cumulative response: +4.24 bp.
| Step | Contribution | Cumulative response |
|---|---|---|
| Before foreign official and Federal Reserve contributions | +4.52 basis points | +4.52 basis points |
| Foreign official | +4.41 basis points | +8.93 basis points |
| Federal Reserve | -4.69 basis points | +4.24 basis points |
Interpretation: The foreign-official and Fed components are direct attributions, not investor-removal counterfactuals. The proxy-SVAR provides adequate but not strong joint identification, so these are conditional model responses rather than precisely identified causal effects.
Source: Dissecting Treasury Market Resilience, Figure 7 and Section 4.
Persistent foreign withdrawals
Retrenchment changes the response to a later inflation shock.
A permanent foreign withdrawal changes current yields and the investor base present when a later inflation shock occurs. Because foreign official and foreign private demand respond differently to inflation, the model captures how the market’s later response changes.