Seminar in Macroeconomics - Tsvetelina Nenova (Bank for International Settlements (BIS)

Global or Regional Safe Assets: Evidence from Bond Substitution Patterns

Tuesday 3 December 2024 - 12h15 to 13h30 - General public

Extranef 109



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This paper provides novel empirical evidence on portfolio rebalancing in inter-national bond markets through the prism of investors’ demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world’s two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy.

Published from 20 August 2024 to 4 December 2024
Gianluca Benigno
Visibility:
published