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Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies

Author/Editor: Serkan Arslanalp | Tigran Poghosyan
Authorized for Distribution: February 11, 2014
Electronic Access: Free Full Text (PDF file size is 770KB)
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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.
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Series: Working Paper No. 14/27
Subject(s): Foreign investment | Bonds | Capital inflows | Developed countries | Sovereign debt | Cross country analysis
    Published:   February 11, 2014        
    ISBN/ISSN:   9781475558784/1018-5941   Format:   Paper
    Stock No:   WPIEA2014027   Pages:   33
    Price:   US$18.00
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