TAILIEUCHUNG - Government Bonds and Their Investors: What Are the Facts and Do They Matter?

All else being equal, a bond fund with a longer average maturity or average duration will usually generate higher interest income than one with a shorter average maturity or basic relationship holds true because longer-term bonds must pay higher interest rates than shorter-term bonds to compensate for the risk that future events (such as rising interest rates or inflation) will erode the bond investment’s value. How interest rates affect bond fund prices For many new investors, one of the most confusing aspects of investing in bond funds is the relationship of a bond fund’s share price to interest rates. But investors should have a clear understanding of that relationship. | WP 12 158 Government Bonds and Their Investors What Are the Facts and Do They Matter Jochen R. Andritzky INTERNATIONAL MONETARY FUND 2012 International Monetary Fund WP 12 158 IMF Working Paper Fiscal Affairs Department Government Bonds and Their Investors What Are the Facts and Do They Matter 1 Prepared by Jochen R. Andritzky Authorized for distribution by Martine Guerguil June 2012 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author s and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author s and are published to elicit comments and to further debate. Abstract This paper introduces a new dataset on the composition of the investor base for government securities in the G20 advanced economies and the euro area. During the last decades investors from abroad have increased their presence in government bond markets. The financial crisis broke this trend. Domestic financial institutions allocated a larger share of government securities in their portfolios as Japan has done since its crisis in the 1990s. Increases in the share held by institutional investors or non-residents by 10 percentage points are associated with a reduction in yields by about 25 or 40 basis points respectively. The data show a varied lead-lag relationship between bond yields and investor holdings. Portfolio balance estimates suggest that a change in statutory or regulatory holdings of government securities to the tune of 10 percent of the outstanding stock causes expected returns to decline by 7 to 25 basis points. JEL Classification Numbers G11 H63 Keywords Public debt government bonds investor base advanced market economies Author s E-Mail Address jandritzky@ 1 Comments and helpful thoughts are gratefully acknowledged from Serkan Arslanalp Max Fandl Martine Guerguil Manmohan Kumar Andre Meier Christian Schmieder Tobias Wickens and

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