Government bonds and their investors what are the facts and do they matter

New evidence

In a fresh paper, I analyse the composition and evolvement of the investor base over the advanced G20 countries and the Eurozone (Andritzky 2012). The analysis demonstrates a ten percentage point upsurge in the share of bonds held by non-residents is connected with a drop in yields by about 40 basis points and higher volatility.

The investor base for government bonds: What exactly are the facts?

A fresh dataset on the investor composition of government securities in advanced G20 countries shows a big amount of region- or country-specific patterns (Figure 1). Canada, the united kingdom, and the united states – countries with very deep financial markets and highly developed financial systems – exhibit a diversified investor base with significant holdings by all investor types. Europe (and Australia) show deep ties with non-resident investors. On the other hand, Japan and Korea have a minimal share of non-resident holdings but sizable holdings of government entities and state-owned enterprises.

Figure 1 . Holders of government securities in G20 advanced countries and the Eurozone

Source: Country authorities, IMF staff calculations

Over the last decade, the share of non-resident holdings has markedly increased in every countries apart from Canada and Japan and frequently makes up the biggest share of the investor base (Figure 2). Before the crisis, global imbalances and reserve flows were key causes of the upsurge in non-resident holdings. Financial regulation further catalysed financial integration, for example through the use of a zero risk weight under bank prudential rules for all government bonds in the Eurozone.

Figure 2 . Non-resident holdings of government securities

Sources: Country authorities, IMF staff calculations

Notes : 1/ Last observation identifies 2012; 2/ Last observation identifies 2002

The crisis has slowed as well as reversed this trend. Reserve accumulation has ceased to do something as the primary driver of non-resident government bond holdings for reserve currency issuers. In other, riskier markets, the crisis triggered a marked pullback of foreign investors, repeating the normal pattern of increased home bias in the aftermath of crises. As result, non-resident holdings have stagnated in lots of countries, and also have fallen in Greece, Ireland, Portugal, and Spain. The recent tightening of prudential rules may have cemented this development.

As a flipside to international financial integration, the share of government securities held by domestic accounts (which are dominated by finance institutions) decreased before the crisis. Banks’ portfolio allocation towards government securities was traditionally lower in market-based financial systems including the UK and the united states (Figure 3). In more bank-based financial systems of the Eurozone (and Canada), banks traditionally held a more substantial share of their assets in government securities. However, in countries where financial systems deepened significantly or credit booms occurred, such as for example in pre-crisis Greece, banks’ portfolio share of government bonds dropped dramatically.

Figure 3 . Share of domestic government security holdings in finance institutions

Sources : Country authorities, ECB, OECD, IMF staff calculations

Notes : The category ‘other financial institutions’ can be used for countries in which a breakdown between non-bank financial intermediaries and private insurance and pension funds is unavailable. The central bank is roofed in ‘banks’ for Spain, and in ‘other financial institutions’ for Greece. No data apart from for banks are for sale to Germany. Total unconsolidated assets are from annual OECD data. Latest data is in 2010 2010 aside from Germany and France (2009).

Mirroring lower non-resident flows, financial sector holdings rose in lots of countries in the post-crisis period, which is marked by deleveraging, flight for safety, and higher government financing needs. The near future outcome may resemble the development in Japan during the last decade where increasing government debt and financial sector restructuring has result in a sizeable concentration of sovereign exposure in the financial sector. Consequently, financial stability becomes closely intertwined with the stability of the federal government bond market.

Does the investor base matter for bond yields?

Specific drivers affecting the composition of the investor base have already been found to correlate with bond yields, such as for example quantitative easing (Krishnamurthy and Vissing-Jorgensen 2011), reserve accumulation (Beltran et al. 2012), home bias (Fidora et al. 2006), or pension fund regulation (Greenwood and Vayanos 2009). The database by Andritzky (2012) facilitates estimations of the partnership between investor base and yields in a more substantial sample of 13 advanced countries independent of specific policy changes or trends. Empirical analysis shows a substantial negative correlation between changes in the bond yield and the share of securities held by certain investor groups. For example, a rise in the share of securities held by non-residents by ten percentage points is connected with a decline in yields of 32 to 43 basis points, or more to 66 basis points in the euro area. For domestic institutional investors, the result is somewhat smaller at about 26 basis points and less robust. The info thus lend support to the idea that larger non-resident, and in addition institutional investor holdings, are connected with lower yields. Addititionally there is some evidence that the volatility of yields increases with the share of non-resident holdings, which are perceived to be less ‘sticky’.

However, the partnership between non-resident holdings and yields will not set up a causal relationship. As the arrival of non-resident buyers, for whom foreign bonds may provide a diversification benefit, is often connected with a drop in yields, it might also be low stable yields predicated on sound macroeconomic fundamentals that attract foreign buyers. Granger causality tests show a multifaceted lead-lag relationship between changes in holdings and yields. Utilizing a VAR analysis, Andritzky (2012) finds no significant evidence for non-resident investors pushing down yields, as the aftereffect of falling yields attracting foreign buyers dominates the joint sample.


The comparative study of the investor base of government securities in advanced countries provides several insights.

  • First, the run-up to the crisis was marked by increasing portions of securities held by non-resident investors. This trend was fuelled by reserve accumulation, financial integration, and a supportive regulatory environment. It has ended and is unlikely to come back to the same degree.
  • Second, domestic investors emerged as primary buyers of domestic issuance through the crisis, while non-resident investors tended to withdraw. This pattern is similar to previous crises, and home bias increased.
  • Third, large government securities holdings by finance institutions in Japan create a close link between risks in the lender and government bond market. This development could possibly be indicative for other countries following the crisis where investors continue steadily to deleverage and government debt expands.
  • Fourth, econometric analysis of the info confirms an increasing share of non-resident investors and institutional investors is connected with lower yields. The info provide evidence that volatility increases in the current presence of non-resident investors.


Andritzky, J (2012), “Government Bonds and Their Investors: WHAT EXACTLY ARE the reality and Do They Matter?”, IMF Working Paper No. WP/12/158, Washington D.C.

Beltran, D, M Kretchmer, J Marquez, and C Thomas (2012), ”Foreign Holdings folks Treasuries and US Treasury Yields“, Federal Reserve Board.

Fidora, M, M Fratzscher, and Christian Thimann (2006), “Home Bias in Global Bond and Equity Markets”, ECB Working Paper 685.

Greenwood, R, and D Vayanos (2009), “Price Pressure in the federal government Bond Market,” Unpublished.

Krishnamurthy, A., and A. Vissing-Jorgensen, 2011, “THE CONSEQUENCES of Quantitative Easing on INTEREST LEVELS,” Northwestern University, Unpublished.

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