Who Holds Sovereign Debt and Why It Matters

Abstract

This paper studies whether investor composition affects the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, nonbank private and official investors for 101 countries across three decades. Compared with other investors, private nonbank investors absorb a disproportionate share of the debt supply, and their demand for emerging market debt is most price responsive. A counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 5.8% yield increase but an outsized 8.4% increase without nonbank investors. We conclude that sovereigns are vulnerable to the loss of nonbanks.