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Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies

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  • Serkan Arslanalp

    () (International Monetary Fund, USA)

  • Tigran Poghosyan

    () (International Monetary Fund, USA)

Abstract

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. Incontrast, 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. These results suggest that changes in the foreign investor base for sovereign debt can have economically and statistically signifi cant effects on sovereign bond yields, independent of other standard macroeconomic determinants of bond yields.

Suggested Citation

  • Serkan Arslanalp & Tigran Poghosyan, 2016. "Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(6), pages 45-67, June.
  • Handle: RePEc:sgm:jbfeuw:v:2:y:2016:i:6:p:45-67
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    Cited by:

    1. Michele Manna & Stefano Nobili, 2018. "Banks' holdings of and trading in government bonds," Temi di discussione (Economic working papers) 1166, Bank of Italy, Economic Research and International Relations Area.
    2. Camila Henao Arbelaez & Nelson Sobrinho, 2017. "Government Financial Assets and Debt Sustainability," IMF Working Papers 17/173, International Monetary Fund.
    3. Blattner, Tobias Sebastian & Joyce, Michael A. S., 2016. "Net debt supply shocks in the euro area and the implications for QE," Working Paper Series 1957, European Central Bank.
    4. Dufrénot, Gilles & Gente, Karine & Monsia, Frédia, 2016. "Macroeconomic imbalances, financial stress and fiscal vulnerability in the euro area before the debt crises: A market view," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 123-146.
    5. repec:eee:intfin:v:51:y:2017:i:c:p:75-91 is not listed on IDEAS
    6. Gianluca Cafiso, 2014. "Debt Sustainability in the Case of External Debt. An Analysis Based on Italy's Treasury Auctions," CESifo Working Paper Series 5021, CESifo Group Munich.
    7. Rudra P. Pradhan & Mak B. Arvin & Sara E. Bennett & Mahendhiran Nair & John H. Hall, 2016. "Bond Market Development, Economic Growth and Other Macroeconomic Determinants: Panel VAR Evidence," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(2), pages 175-201, June.
    8. Weneyam Hippolyte Balima & Jean-Louis Combes & Alexandru Minea, 2015. "Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference?," Working Papers halshs-01128239, HAL.
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    10. repec:bla:worlde:v:40:y:2017:i:9:p:1718-1749 is not listed on IDEAS
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    12. Knarik Ayvazyan & Teresa Daban Sanchez, 2015. "Spillovers from Global and Regional Shocks to Armenia," IMF Working Papers 15/241, International Monetary Fund.
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    17. Jacob Boudoukh & Jordan Brooks & Matthew Richardson & Zhikai Xu, 2016. "The Complexity of Liquidity: The Extraordinary Case of Sovereign Bonds," NBER Working Papers 22576, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Government bond yields; investor base; interest rate determinants;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G1 - Financial Economics - - General Financial Markets

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