Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies

Serkan Arslanalp and Tigran Poghosyan

No 2014/027, IMF Working Papers from International Monetary Fund

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. In contrast, 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. Our results suggest that the divergence in long-term bond yields between core and periphery economies in the euro area may continue unless the “normalization” of macroeconomic determinants of bond yields is accompanied by a similar “normalization” of the foreign investor base.

Keywords: WP; sovereign bond bond yield; bond yield; sovereign bond; debt; Government bond yields; investor base; interest rate determinants; debt share; government bond bond yield; debt ratio; benchmark bond yield; FIB variable; forward rate; short-term bond yield; debt composition; yields in a panel; government debt holding; Bond yields; Yield curve; Sovereign bonds; Global (search for similar items in EconPapers)
Pages: 33
Date: 2014-02-11
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Citations: View citations in EconPapers (36)

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Journal Article: Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies (2016)
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