Who Holds Sovereign Debt and Why It Matters
This paper studies the impact of investor composition on the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, non-bank private, and official investors for 95 countries over twenty years. Private non-bank investors absorb disproportionately more sovereign debt supply than other investors. Moreover, non-bank investor demand is most responsive to the yield. Counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 6.7% increase in costs, but an out-sized 9% increase if non-bank investors are absent. We conclude that these sovereigns are vulnerable to losing non-bank investors.
- National governments that finance their activities by issuing debt must find someone to buy it. The interest rate they must pay to...