Who Holds Sovereign Debt and Why It Matters

Xiang Fang
HKU

Bryan Hardy
BIS

Karen K. Lewis
UPenn, NBER, CEPR

7 June 2024
IMF-CARF-Waseda University
Debt Conference

Disclaimer: The views expressed here are those of the authors and not necessarily thoseof the Bank for International Settlements.

Rising Sovereign Debt Raises Questions about Investors
Figure: Government Debt to GDP by Country Groups

100

75

50

25

0
03

06

09

AE

12

15

18

21

EMDC

Government debt rising for all countries
Who is holding this debt?
Might ownership affect borrowing cost exposure?

Motivation

Overview

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Disaggregated

Framework

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Conclusion

AppendixSome Breakdowns by Investor Groups
1

.7

.9

.6

.8
.5
.7
.4

.6
.5

.3
02 04 06 08 10 12 14 16 18
Japan

AE(excl Japan)

Share Held Domestically

02 04 06 08 10 12 14 16 18
EM

Share Held by Non-banks

Share of domestic holdings of debt have:
Increased for EMs
Decreased for AEs, particularly Japan

Share of holdings by Non-banks show more short-term variation
Fang, Hardy, and Lewis

Who Holds Sovereign Debt

Motivation2

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Conclusion

AppendixSome Presumed Holders in the Sovereign Debt Literature
Foreign investor"bank": EM Sovereign debt literaturee.g., Eaton and Gersowitz (1981), Arellano (2008), Arellano and Ramanarayanan (2012)

Domestic banks: Sovereign-bank "doom loop" literaturee.g., Bocola (2016), Farhi and Tirole (2018), Perez (2018)

Global banks: Sovereign debt crisis
e.g., Morelli, Ottonello and Perez (2021)

Households and banks: Safe asset of AE debt
e.g., Vissing-Jorgenson and Krishnamurthy (2012), Jiang, Krishnamurthy, Lustig (2021)

General Questions in this Paper
What do we know about who holds the debt?
Does this ownership matter to sovereign borrowers?

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Appendix

What we do to answer...

1. Construct aggregate data for investor holdings of govt debt
"Who holds the govt debt of a country?"
Foreign versus Domestic
Further disaggregated into
Private Banks, Private "Non-banks", Official holders

Balanced sample: 95 countries from 1996 to 2018
Full unbalanced sample: 152 countries beginning 1991
MaggioriNiemannSchreger

Fang, Hardy, and Lewis

ArsanalpTsuda

Who Holds Sovereign Debt

Overview

4Motivation

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Appendix

What we do to answer...
1b. Decompose variations in debt into investor holdings"Who holds expansions of govt debt?"
Non-Bank Private Investors expand holdings the most
Non-Banks take on 69%, despite average holdings of only 46%
By contrast, Banks take on 20%, smaller than average of 28%

2. Disaggregated look at Nonbanks in Euro Area, US, UK"Who are the Nonbank investors?"
Biggest marginal investors are Mutual funds
Exception UK: Pensions more importantFang, Hardy, and Lewis

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Appendix

What we do (cont.)...
3. Investor Demand Framework"How do investors respond to yield and characteristics?"
Findings for EM investors: Nonbank foreign demand most elastic
4. Counterfactual Analysis "Why Ownership Matters"
Calculate borrowing cost exposure
Findings: Exposure to Nonbanks greatest
What we don’t do yet ...
Provide an equilibrium model

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Appendix

1.Data and Marginal Debt-holder Decomposition
Data Decomposition for Aggregate Set
Total bookvalue of government debt for country j : Dj
Total investor holdings for country j : H j
Further decompose H j into three main groups
Private Banks
Private "NonBanks"
Official (Central Banks, IMF,etc)

Next decompose each into Foreign and Domestic
Therefore, total investor groups: I = 6
Accounting Identity at time t
Dj,t

=

I
X

i
Hj,t

i=1
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Appendix

Data Construction
Data construction is from annual aggregates
Total debt outstanding
IMF Historical Public Debt Database

Data on domestic bank and central bank holdings
IMF, Central bank websites

Data on external holdings
Avdjiev et al (2022) - BIS, IMF, World Bank

Data on foreign official holdings
Arslanalp and Tsuda (2012,2014) and World Bank

End result:1744 country-year observations
Spanning 95 countries over 1991-2018
MarginalHolderFigures
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Appendix

Debt Levels and Investor Holder Composition
Figure: Debt Holdings by Investor Group (USD bill)
50

80

40
60
30
40
20
20

10
0

0
2002

2006
DomBK

2010

2014

DomNB

2018
DomCB

Advanced economies

2000 2003 2006 2009 2012 2015 2018
ForBK

ForNB

ForOffEmerging markets

AEs: Growing share of Dom & Foreign CBs (QE, safe assets)
EMs: Growing share of Dom Banks & NonBanks
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Appendix

Who Holds Marginal Increases in Sovereign Debt?
Consider decomposition regressioniiHj,t− Hj,t−1
Dj,t − Dj,t−1= αj + αt + β0i+ εij,tDj,t−1
Dj,t−1iHj,tholding of country j’s debt by investor group i

Dj,t is the total debt of country j
Then β0i captures the marginal variation in holdings as:
X
1=
β0i
i

Finding: When the sovereign debt increases by 1 unit
Nonbanks hold roughly 0.70 of the increase

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Appendix

Marginal Responses are Not Average Responses
DifferentEpisodes

DomBK

DomNB

DomCB

ForBK

ForNB

ForCB

Panel A: Marginal Share β0i
All

0.16

0.39

0.05

0.04

0.30

0.06

AE

0.02

0.39

0.09

0.06

0.40

0.04

EM

0.21

0.43

0.04

0.05

0.24

0.04

Panel B: Average Share
All

0.22

0.28

0.07

0.06

0.18

0.19

AE

0.19

0.32

0.04

0.10

0.21

0.14

EM

0.26

0.28

0.07

0.06

0.17

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0.16
Marginal Holders

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Appendix

Investor Decomposition Takeaways

In response to variations in government debt
NonBank investors absorb largest share
Banks absorb least
perhaps due to prudential policy

Compared to standard literaturesuggests greater role for Nonbank investors

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Appendix

2.Disaggregated Investor Groups"Non-Banks" -Large group including many investor types
Private Corporations
Pensions and Annuities
Endowments
Hedge Funds
Mutual Funds
Households

Question: Which investors drive aggregate results?
Analyze disaggregated securities holdings for:Euro Area, United States, United Kingdom

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Appendix

Disaggregated NonBank Takeaways
Repeat decomposition for subgroups within Nonbank group
Marginal response β0i shows Nonbank behavior driven by:
Mutual Funds absorb largest share β0M F ≈ 0.85
Insurance and Pensions also important but less β0IP ≈ 0.14
except for UK

Corporations, Households, others relatively unresponsive
EA NonBank

EA General

USTreasUKGilts

But so far analysis reduced form
Understanding behavior requires identification
We turn to next...
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Appendix

3. General Framework: Investors and Issuers
General Conceptual Framework: Investors and Issuers
Issuers: Standard decisions to borrow given priceDebt-to-Income policy function dt ≡ d(Xj,t ; Pj,t )Defaultable Debt:
e.g., Eaton-Gersowitz (1981), Arellano (2008)

Safe asset:
e.g., Krishnamurthy Vissing-Jorgensen (2012), Jiang, et al (2019)

Investors: Standard Asset Demand System (Koijen-Yogo)

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Appendix

Sovereign Debt Funding

Government targets Debt-to-GDP facing creditors
Each creditor i provides funding share of country j debt as:
!
i
H
j,t
hij,t ≡
dj,tDj,tSo market clearing condition is:

Pj,t dj,t =

I
X

i
Pj,t
hij,t

i=1

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AppendixFunding Estimation
Instrument using market clearing (Koejin-Yogo)i
Calculate Market value hi,mj,t = hj,t Pj,tEstimate market value for i given debt book value for j:0iln hi,mj,t = β0 + β1 Xj,t + θj + εj,tImpose market clearing with fitted values
Xdhi,mj,t = dj,t Pj,t = dj,t exp(−T ȳj,t )i

Use ȳj,t as instrument for endogenous yield yj,t
To address endogenous dj,t , project on dj,t−1 , Xj,t

DebtProjection

ReturnProjections

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Appendix

Investor Funding Estimates: EM countries

Sovereign yield

Inflation

Observations

(1)
Dom
Bank

(2)
Dom
NonBank

(3)
Dom
Cen

(4)
For
Bank

(5)
For
NonBank

(6)
For
Cen

12.1∗∗(6.8)

22.9∗∗

27.4

28.2∗∗

38.4∗∗

24.9∗∗(8.8)(17.2)(13.7)(19.7)(14.5)-3.5∗∗-3.5∗∗-4.4∗-6.0∗∗∗-4.0-4.1∗∗

(0.9)

(1.3)

(2.3)

(1.9)

(2.6)

(2.0)

350

323

288

350

305

342

Country Controls include GDP, GDP growth, export share, sovereign ratings

Higher yield, lower inflation => general increase
Nonbanks have highest response within category (Dom or For)AE Sovereign Nonbanks also most responsive
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AEFunding
Framework18

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AppendixFunding demand can also be viewed as Investor Demand"Investors" vary by country
Domestic banks for country A => Foreign Banks for country B
Identity of foreign banks unknown
Assumptions to Relate to Demand:
Focus on EM countries to mitigate identity problem
Foreign investors are USD-based
Market clearing condition becomes (as in Koijen-Yogo)
Pj,t Ej,t Qj,t =

I
X
i=1

i
ωj,t
Ait =

I
X

i
i
Pj,t
Hj,t

i=1

where Ej,t is USD price of currency j, Ait is wealth for i, Dj,t = Ej,t Qj,tFang, Hardy, and Lewis

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Appendix

Investor components
Investor demand H for country j’s portfolio demand depends
on: CARApreferences
Exogenous characteristics Xj,tExcess returns relevant to the investor µj,t
Excess returns by investor type
Domestic => local currency returns less risk-free
Foreign => excess local currency returns plus currency change
Problem: Bond price and hence investor returns are endogenous todemand InstrumentReturns
Results similar to funding results above

Fang, Hardy, and Lewis

InvestorDemand

Who Holds Sovereign Debt

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Appendix

4. Borrowing sensitivity Analysis
What is the cost sensitivity for sovereigns given their investors?
Sensitivity ≡ % change in yield for % change in debt
6Xii
Djt Pjt =Hjt
Pji (Hjt)
i=1

Differentiating wrt the yield y:
6
X
∂yjt
ηjt ≡
=
∂Djt /Djt
i=1

i
∂yjt
∂Djt /Djt

!

6
X
dHji
=
dDj
i=1

aij
νji

!

where
aij is marginal absorption of investor i
νji is semi-elasticity of demand wrt yield

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Appendix

4. Emerging markets: Counterfactual Results
Overall η = 2.33 %Excluding non-banks, this rises to 2.91 %Investor Sensitivity Counterfactuals

Overall

No
Banks

No
Nonbanks

No
Off

InflationGDPgrowth

2.33

2.09

2.91

2.25

1.48

-2.77

EM countries most sensitive to (losing) Non-bank investors
To keep current market-value of debt same
One point increase in inflation requires 10.4%
One precentage point drop in GDP requires 11.6%
Based on Average 8.8% yield in sample

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Appendix

Conclusions

Documented Who Holds Sovereign Debt
Expansions in govt debt largely absorbed by private Nonbanks
Investor demand for EMs most elastic by Nonbanks
EMs have high exposure to borrowers
Greatest contribution from Nonbanks

Therefore, Who Holds Sovereign Debt Matters

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23

Motivation

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Appendix

1.0

2.2

0.8

Total Debt / GDP

Share of Investor Holding

What about Holders of Japanese Debt?

2.0

0.6

1.8

0.4

1.6

0.2
0.0

2004

2008
Domestic Central bankDomestic Bank
Domestic Non-bank

2012

2016

Foreign Official
Foreign Bank
Foreign Non-bank

2020
2024
Total debt/GDP (rhs)

1.4

Domestic holdings shares have declined
Greater share of Foreign Non-bank
Fang, Hardy, and Lewis

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24

Motivation

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Appendix

THANK YOU!

Fang, Hardy, and Lewis

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25

Connection to Maggiori et al Data
Maggiori, Neiman, and Schreger (2020)
Detailed mutual fund holdings of private debt only

Coppola, Maggiori, Neiman, and Schreger (2021)
Private and public debt holdings, externally held only
No data on domestic holding breakdown

On our "to do" list to crosscheck foreign holdings
BackConnection to Arsanalp and Tsuda

Arsanalp and Tsuda (2012),(2014)
Develop similar data set for AE and EM, resp.
Updated quarterly on IMF website

Main difference: CoverageTime period
Basic data set begins 2004
Some earlier data but without investor groups

Countries
24 AEs, 24 EMs
Extended data but without investor groups
BackMotivation

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Marginal Holders

Disaggregated

Framework

Investors

Conclusion

Appendix

Which Non-Bank Investors are Marginal?
To address - Analyze disaggregated EA securities holding data
Quarterly from 2013 to 2020, foreign only
Repeat early decomposition using disaggregated groups
HH

NFC

InsurPens

OthFin

All

0.01

0.00

0.14

0.85

AE

0.02

0.01

0.12

0.85

EM

0.01

0.00

0.14

0.85

Within NonBanks, Hedge Funds and Mutual Funds account for 85%
Insurance and Pensions account for 14%
Other Nonbank groups unimportantback

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Appendix26

Motivation

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Appendix

Figure: Disaggregated Marginal Holders: US Treasuries

0.5

0.3

0.4
0.2
0.3
0.1
0.2
0.0

0.1

–0.1

0.0

Share Non-bank marginal

Marginal share
ForeignbackFang, Hardy, and Lewis

DomCB
DomBank
DomNB

MMF
I&P
HH

Who Holds Sovereign Debt

Oth Funds
Oth FinOth NonFin
Appendix27

Portfolio Preferences with CARA

Standard Portfolio Optimizationi

V(hiN,t ) = M ax E(−e−ANt+1 , uiN,t ) given{hiN,t }i= [RH,t hiN,t + R0,t (1 − hiN,t )]Nti
Nt+1w
where RH,t = RH (Xwt ) for Xt , vector of global variablesiwiImplies solution hi,∗N,t = hN (Xt , uN,t ): Share of total debt held
Back

Motivation

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Appendix

Euro Area: Foreign Sovereign Debt by General Groups

Gov

Banks

NonBankAll

0.01(0.00)

0.23***(0.06)

0.77***(0.06)

AE

0.01(0.01)

0.27**(0.09)

0.73***(0.09)

EM

0.01***(0.00)

0.11**(0.04)

0.89***(0.04)

Note: Debt-weighted holdings
BackFang, Hardy, and Lewis

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Motivation

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Appendix

Figure: Disaggregated Marginal Holders: UK Gilts

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0.0

0.0

Marginal share
ForeignbackFang, Hardy, and Lewis

Share Non-bank marginalDomCB
DomBank
DomNB

Funds
& Oth
I&P

Who Holds Sovereign Debt

HH
Oth
NonFinAppendix29Motivation

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Framework

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Conclusion

Appendix

Projecting returns
Foreign Investors: Expected holding returns in USDjj+ sjt+1 − sjt − ytU S = φpjt + ψ(sjt − ztj ) + χj + νt+1
rt+1

j
is the holding return of sovereign debt of country j
rt+1

sjt is the log exchange rate, ytU S is short term US treasuries.
Domestic Investors: Expected holding return in local currencyjje t (j) + χrt+1− ytj = φp
ej + νet+1

ytj is the short term rate in local currency of country j.
backFang, Hardy, and Lewis

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Appendix30Motivation

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Appendix

Counterfactual Analysis Details
Framework
Demand function of investor group i isiHj,t= ai + bi yj,t + θji + εij,tYj,tDj,t exogenous
Investor group i holds ᾱi fraction of total debt
The market clearing condition isX
Dj,t exp(−ȳj,t )(1 − ᾱi ) = Yj,t (ak + θjk + bk ȳj,t )k6=iCompare the distance hypothetical ȳj,t and actual observed yj,tlink it to the share of investor group i.
BackFang, Hardy, and Lewis

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Appendix31Motivation

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Appendix

Debt Levels and Holder Shares

Debt Levels and Holder Shares
Advanced Economies

Emerging Markets & Developing Economies

1.2

0.5

holdings of debt (share of GDP)holdings of debt (share of GDP)

0.45
1
0.8
0.6
0.4
0.2

0.4

Foreign Official

0.35

Foreign Nonbank

0.3
0.25
0.2
0.15
0.1

Foreign Bank
Domestic Central Bank
Domestic Nonbank
Domestic Bank

0.05
01995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 201701995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Holdings by investor groups vary along with size of debt

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Appendix32Motivation

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Conclusion

AppendixDifferent EpisodesiiHj,t− Hj,t−1

Dj,t−1i Dj,t − Dj,t−1= αj + αt + β0

Dj,t−1ii+ β1 Ij,t + β2
Dj,t − Dj,t−1i
× Ij,t + εj,tDj,t−1

1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

0.0

–0.2
No
Recession No
recession
crisisDomestic
central bankbackFang, Hardy, and Lewis

CrisisForeignbank–0.2
Before2000

2000-2009

Foreignnon-bank

Who Holds Sovereign Debt

After
2009
Foreign
official

Appendix33

Motivation

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Framework

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Appendix

EM Debt Projection Estimatesback

Debt-to-GDP

Fang, Hardy, and Lewis

Lag Debt-to-GDP

0.72∗∗∗(0.03)GDP Growth-0.09(0.11)Inflation

0.11∗∗∗(0.04)

Exp-to-GDP-0.03∗(0.02)

Observations
R2

362
0.96

Who Holds Sovereign Debt

Appendix34

Motivation

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Framework

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Conclusion

Appendix

Investor Holding Estimates: AE countries

Table: Advanced Economy Funding: Instrumental Variable Estimates

Log yield

(1)
DomBK

(2)
DomNB

(3)
DomCB

(4)
ForBK

(5)
ForNB

(6)
ForCB

1.377∗∗∗

2.179∗∗

1.790∗∗

0.979∗∗

3.111∗∗

0.686∗∗(0.497)(0.865)(0.782)(0.391)(1.373)(0.301)

3.705

4.007

20.007

∗

∗∗

8.820

11.810∗∗∗(5.994)(9.532)(11.488)(4.940)(14.611)(3.801)

274

264

249

275

267

275

Inflation

Observations

9.769

Country Controls include GDP, GDP growth, inflation, and sovereign ratings

Nonbanks most responsive to yield within Dom and For groups
backFang, Hardy, and Lewis

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Appendix35Motivation

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Appendix

Shares and Elasticities: AE countries

(1)
Dom
Bank

(2)
Dom
NonBank

(3)
Dom
Cen

(4)
For
Bank

(5)
For
NonBank

(6)
For
Cen

Elasticity

NA

0.79

NA

NA

0.92

NA

Mean Share

0.15

0.23

0.04

0.07

0.15

0.10

Only NonBanks have well-defined elasticities
And are less than one
Overall - AE debt relatively unaffected by yieldback

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Appendix36Motivation

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Appendix

Instrument for returns

Three steps as above:
1

i,m
i
= Hjt
Pjt
Compute ex-post market value: Hjt

2

Estimate market value of demand for holdings:
i,mln Hjt= αji + αti + α1i Xjt + uijt

3

Take fitted values and solve for the price that clears the market
6
X



i,m
\
exp lnHjt= Djt P̃jt

i=1
back

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Appendix

IV Results: Emerging Markets
(1)
Dom
Bank

(2)
Dom
NB

(3)
Dom
CB

(4)
For
Bank

(5)
For
NB

(6)
For
Off

Expected Return

4.2∗
(2.2)

7.8∗∗∗
(2.8)

10.3∗
(6.0)

8.0∗∗
(3.9)

10.1∗
(5.2)

6.4∗
(3.8)

GDP Growth

3.7∗
(2.0)

4.3
(2.6)

10.1∗
(5.9)

5.1
(4.9)

17.4∗∗
(7.0)

7.5
(4.8)

Inflation-3.5∗∗∗(0.91)-3.5∗∗∗(1.2)-4.9∗∗(2.4)-7.2∗∗∗
(2.5)

-5.1
(3.2)

-4.7∗∗(2.4)

Observations

350

323

288

350

305

342

Note: Other controls include exports/GDP, log GDP, and sovereign credit rating.

Non-banks’ holdings most responsive to expected excess return
Higher growth and lower inflation increases demandbackFang, Hardy, and Lewis

Who Holds Sovereign Debt

Appendix38