US investment in global bonds: as the Fed pushes, some EMEs pull

Abstract

We analyze reallocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors' allocations toward emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in EME allocations is associated with global "push" factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest reallocations going to those EMEs with strong macroeconomic fundamentals such as less volatile inflation and more positive current account balances.

U.S. Monetary Policy and Fluctuations of International Bank Lending

“…6 It is also well-established that these capital flows transmit global shocks to real performance of individual economies. 7 The literature tends to distinguish global (push) factors from borrowing country-specific (pull) factors that drive international bank lending (Spiegel, 2009;Fratzscher, 2012;Forbes and Warnock, 2012;Burger et al, 2015). 8 Two global factors have consistently emerged across empirical studies as being important drivers: (i) global risk aversion, typically approximated by the VIX (Forbes and Warnock, 2012;Miranda-Agrippino and Rey, 2015;Bruno and Shin, 2015b), and (ii) monetary policy in developed countries, usually measured using policy rates in advanced economies (MilesiFerretti and Tille, 2011;Shin, 2012;Rey, 2015).…”

The shortage of safe assets in the US investment portfolio: Some international evidence

“…First, the paper contributes to the literature on international portfolio allocation and cross-country interdependencies. In a recent contribution, Burger, Sengupta, Warnock, and Warnock (2015) analyze the impact of portfolio re-allocations on US bond portfolios and conclude that global "push" factors, like historically low US long-term interest rates and quantitative easing, have contributed to the increasing demand of US investors for emerging market (EMEs) securities. Burger, Sengupta, Warnock, and Warnock (2015) find that among EMEs, capital flows have been directed to countries with sound macroeconomic fundamentals like low inflation volatility and positive current account balances.…”

“…As a consequence, advanced economies, in particular the US, have been reallocating assets towards emerging markets. Burger, Sengupta, Warnock, and Warnock (2015) show, for the post-crisis period, that US investors' increasingly raise their exposure with respect to emerging markets, more precisely towards local currency bonds. This finding mainly stems from global "push" factors such as low US long-term interest rates and unconventional monetary policy.…”

The Political Determinants of Government Bond Holdings

“…Comparing US bond holdings in 2001 to 1997, they find that US investors moved into more developed bond markets and away from countries with smaller markets and poor credit ratings. Burger et al (2014) also use TIC data and investigate the effects of bond yields, macroeconomic indicators, institutional variables and openness on local currency and US Dollar-denominated bonds separately. They also test the role of global "push" factors such as the US Treasury rate and the volatility index VIX.…”

“…Several interesting strands of the literature have investigated the determinants of bond holdings in general (Burger and Warnock, 2003;Lane, 2005;Fidora et al, 2007;Ferreira and Miguel, 2011;Vanpee and De Moor, 2012;Burger et al, 2014), as well as the sovereign bond holdings of banks (Angeloni and Wolff, 2012;Battistini et al, 2013;De Bruyckere et al, 2013;Buch et al, 2013;Gennaioli et al, 2014;Acharya and Steffen, 2015). The literature here focuses on macroeconomic fundamentals and financial market variables.…”