Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies

IMF Working Papers, February 11, 2014

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Asset allocation decisions of international investors are at the core of capital flows.
The 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.

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.
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.
- 35-60 basis points in the U.S.
Foreign outflows over the same period are estimated to have raised 10-year government bond yields by:
- 40-70 basis points in Italy
- 110-180 basis points in Spain

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