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ORCID

Serkan Arslanalp 0000-0001-7464-339X

Keywords

Government bond yields; investor base; interest rate determinants

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

Acknowledgments

The authors would like to thank to Luc Everaert, Abdelhak Senhadji, Ali Abbas, Ruchir Agarwal, Jochen Andritzky, Sergei Antoshin, Andrij Blokhin, Francesco Columba, Heiko Hesse, Bradley Jones, Luc Laeven, Prachi Mishra, Sergejs Saksonovs, Tahsin Saadi Sedik, Anita Tuladhar, and an anonymous referee for helpful comments and discussion.

First Page

45

Last Page

67

Page Count

23

Received Date

University of Warsaw

Revised Date

28 April 2016

Accept Date

25 May 2016

Online Available Date

16 June 2016

DOI

10.7172/2353-6845.jbfe.2016.2.3

JEL Code

E4; E6; G1

Publisher

16 June 2016

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