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The investor base for sovereign debt: Why diversification matters

Author

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  • Sam Foxall
  • Jeffrey Gao

Abstract

Sovereign borrowing is rising, just as central banks are stepping back. Meanwhile, commercial bank holdings of sovereign bonds remain well below pre-global financial crisis levels. This leaves foreign investors and investment funds, often hedge funds, to absorb more of this growing supply. Their greater involvement supports liquidity and robust auction results, but it can also concentrate risk: in stressed markets, correlated deleveraging and fast outflows can translate volatility into higher funding costs, reinforcing the case for investor base diversification.

Suggested Citation

  • Sam Foxall & Jeffrey Gao, 2026. "The investor base for sovereign debt: Why diversification matters," Staff Analytical Papers 2026-29, Bank of Canada.
    • Handle: RePEc:bca:bocsap:26-29
    DOI: 10.34989/sap-2026-29
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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