The Ties That Bond Us: What Demand For Government Debt Can Tell Us About the Risks Ahead


by Serkan Arslanalp and Takahiro Tsuda

It’s not news that emerging markets can be vulnerable to bouts of market volatility. Investors often pull sudden stops—they stop buying or start selling off their holdings of government bonds.

But what has become apparent in recent years is that advanced economy government bond markets can also experience investor outflows, and associated runs. At the same time, some traditional and new safe haven countries have seen their borrowing costs drop to historic lows as they experience rising inflows from foreign investors.

Our new research shows that advanced economies’ exposure to refinancing risk and changes in government borrowing costs depend mainly on who is holding the bonds— the demand side for government debt.

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