Sunday, August 5, 2012

Government bonds and their investors: What are the facts and do they matter?

by Jochen Andritzky

Vox

August 5, 2012

Public debt held by non-residents has been on the rise over the last few decades – that is until the global crisis. This column looks at how the ownership of government bonds in the G20 and the Eurozone. It finds that increased foreign bondholders bring costs as well as benefits.

Prior to the start of the global crisis in late 2008, global imbalances, reserve accumulation and regulatory changes fostered greater cross-border integration of sovereign debt markets as measured by the share of government securities held by non-residents.

Today, this integration has reversed. Aside from safe haven flows, domestic investors are relied on to take up and roll over a larger stock of government debt (Presbitero et al. 2012). This resembles the situation in Japan since its crisis in the 1990s, where domestic institutional investors increased their share of Japanese government securities in their portfolios, compounding sovereign-financial linkages. Recent Eurozone policy changes have strengthened the trend in Europe (Wyplosz 2012).

New evidence

In a new paper, I analyse the composition and evolvement of the investor base across the advanced G20 countries and the Eurozone (Andritzky 2012). The analysis shows that a ten percentage point increase in the share of bonds held by non-residents is associated with a drop in yields by about 40 basis points and higher volatility.

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Read the Paper

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