Government Bonds and their Investors: What Are the Facts and Do they Matter?

Abstract

This paper introduces a new dataset on the composition of the investor base for government securities in the G20 advanced economies and the euro area. During the last decades, investors from abroad have increased their presence in government bond markets. The financial crisis broke this trend. Domestic financial institutions allocated a larger share of government securities in their portfolios, as Japan has done since its crisis in the 1990s. Increases in the share held by institutional investors or non-residents by 10 percentage points are associated with a reduction in yields by about 25 or 40 basis points, respectively. The data show a varied lead-lag relationship between bond yields and investor holdings. Portfolio balance estimates suggest that a change in statutory or regulatory holdings of government securities to the tune of 10 percent of the outstanding stock causes expected returns to decline by 7 to 25 basis points. JEL Classification Numbers: G11, H63

Bank and Sovereign Risk Feedback Loops

“…Others have found positive effects. According to Andritzky (2012), domestic bank purchases of sovereign bonds help stabilize sovereign funding costs. include credit ratings (Correa et al, 2012) and the stock market behaviour (Angeloni and Wolff, 2012).…”

Increase in home bias in the Eurozone debt crisis: The role of domestic shocks

“…In contrast to Andritzky (2012)'s interpretation of the recent increase in home bias in the Eurozone -which emphasizes the role of global factors -, divergent trends among countries sharing a similar currency and their coincidence with the Eurozone sovereign debt crisis suggest that home bias in peripheral countries increased following country-specific shocks affecting sovereign debt sustainability. Brutti and Sauré (2015) highlight that repatriation of assets from foreign to domestic creditors mainly impacted fragile economies and sovereign debt relative to other assets.…”

“…Appendix A provides details on the data we relied on for each country in our sample. Following the literature (Andritzky (2012), Battistini et al (2014, and Brutti and Sauré (2015)), we focus on the share rather than on volumes because the share exhibits a common pattern in fragile economies in our sample and reflects the relative evolution in domestic and foreign holdings, which is expected to be affected following a shock to a country's sovereign risk, as the latter modifies domestic and foreign demand for domestic government debt securities in a distinct manner. Finally, volumes also depend on many other factors, such as the evolution of total debt (and thus of government financing needs) and trade-off opportunities relative to other assets.…”

“…Second, this variable allows to focus on marketable government debt which is widely traded between domestic and foreign investors, following Andritzky (2012). Appendix A provides details on the data we relied on for each country in our sample.…”

“…By contrast, we address a general measure of home bias in sovereign debt, the one that matters for the government's decision. Andritzky (2012) focuses on disentangling the causal relationship between sovereign bond yields and the share of debt held by foreigners in a bi-variate panel VAR specification, whereas we identify structural shocks and distinguish between fundamental and expectations shocks, relying on an updated dataset. To the 4 best of our knowledge, no other work investigates the empirical relationship between home bias in sovereign debt and domestic variables related to sovereign debt sustainability in the Eurozone by distinguishing fundamental and self-fulfilling drivers and by investigating bi-directional causalities.…”