Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies

February 11, 2014

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Serkan Arslanalp, and Tigran Poghosyan. Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies, (USA: International Monetary Fund, 2014) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Asset allocation decisions of international investors are at the core of capital flows. This paper explores the impact of these decisions on long-term government bond yields, using a quarterly investor base dataset for 22 advanced economies over 2004-2012. We find that a one percentage point increase in the share of government debt held by foreign investors can explain a 6-10 basis point reduction in long-term sovereign bond yields over the sample period. Accordingly, international flows to core advanced economy bond markets over 2008-12 are estimated to have reduced 10-year government bond yields by 40-65 basis points in Germany, 20-30 basis points in the U.K., and 35-60 basis points in the U.S. In contrast, foreign outflows are estimated to have raised 10-year government bond yields by 40-70 basis points in Italy and 110-180 basis points in Spain during the same period. Our results suggest that the divergence in long-term bond yields between core and periphery economies in the euro area may continue unless the “normalization” of macroeconomic determinants of bond yields is accompanied by a similar “normalization” of the foreign investor base.

Subject: Bond yields, External debt, Financial institutions, Financial services, Public debt, Sovereign bonds, Yield curve

Keywords: Benchmark bond yield, Bond yield, Bond yields, Debt, Debt composition, Debt ratio, Debt share, FIB variable, Forward rate, Global, Government bond bond yield, Government bond yields, Government debt holding, Interest rate determinants, Investor base, Short-term bond yield, Sovereign bond, Sovereign bond bond yield, Sovereign bonds, WP, Yield curve, Yields in a panel

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/027
Stock No:

WPIEA2014027
ISBN:

9781475558784
ISSN:

1018-5941

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