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Global or regional safe assets: evidence from bond substitution patterns

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  • Nenova, Tsvetelina

Abstract

This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors’ demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world’s two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy. JEL Classification: F30, G11, G15

Suggested Citation

  • Nenova, Tsvetelina, 2025. "Global or regional safe assets: evidence from bond substitution patterns," Working Paper Series 3159, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253159
    Note: 2185045
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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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