consequences of ageing for international finance€¦ · 1total return on bonds denominated in...
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Consequences of ageing for international finance
Hyun Song Shin*Bank for International Settlements
G20 Symposium: “For the Better Future: Demographic Changes and Macroeconomic Challenges”Tokyo, 17 January 2019
* The views expressed here are mine, not necessarily those of the Bank for International Settlements.
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Old age dependency ratio
Ratio of population 65+ per 100 population 15-641
1 Forecast based on the medium fertility variant, 2015 -2100
Source: United Nations
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Old age dependency ratio
Ratio of population 65+ per 100 population 15-641
1 Forecast based on the medium fertility variant, 2015 -2100
Source: United Nations
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Working age population1
As a percentage of total population, %
1 Calculated as population 15 to 65, as a share of total population.
Source: United Nations.
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Pension funds and insurance corporations
1 AT, BE, CA, DE, DK, ES, FI, GB, HU, JP, NO, SE and US. 2 AT, BE, CA, DE, DK, ES, FI, FR, GR, HU, JP, LU, NO, SE, and US.
Source: OECD
Financial assets Debt securitiesUSD trn USD trn
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Debt securities of pension funds and insurance corporations
1 AT, BE, CA, DE, DK, ES, FI, GB, HU, JP, NO, SE and US. 2 AT, BE, CA, DE, DK, ES, FI, FR, GR, HU, JP, LU, NO, SE, and US.
Sources: IMF; OECD.
Pension funds1 Insurance corporations2
In per cent of GDP In per cent of GDP
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Currency denomination of portfolio assets
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Borrowers Investors
A LA L
Country A
A’s currency
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Finding 1: lenders tend to lend in their own currency
BorrowersA L
Investors
A LA L
A’s currencyCountry A
Maggiori, Neiman and Schreger (2018) “International currencies and capital allocation”https://scholar.harvard.edu/maggiori/publications/unpacking-global-capital-flows-micro-data-approach-macro-facts
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Finding 2: corporate borrowers are subject to “original sin”; when borrowing from abroad, they do so in foreign currency
BorrowersA L
Investors
A LA L
A’s currencyCountry A
A L
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Finding 3: exception is the United States and the US dollar
BorrowersA L
Investors
A LA L
US dollarUSA
A L
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Canadian corporate bond issuance
Maggiori, Neiman and Schreger (2018)
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US corporate bonds issuance
Maggiori, Neiman and Schreger (2018)
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Possible mechanisms
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Liabilities side of lender’s balance sheet looms into view
BorrowersA L
Investors
A LA L
A’s currencyCountry A
A L
Pension funds and lifeinsurers have bond-likeobligations; they want
assets that back them up
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Banking sector facilitates currency hedging
BorrowersA L
Investors
A LA L
US dollarUSA
A LCurrency hedgingallows lenders to
convert green into red
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US dollar-denominated cross-border bank claims are mostly to do with non-US advanced economies
Source: BIS locational banking statistics.
USD trn USD trnBy residence By nationality
USD denominated cross border claims by residence and by nationality
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Euro-denominated cross-border bank claims are mostly focused on the euro area
Source: BIS locational banking statistics.
USD trn USD trnBy residence By nationality
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Evidence on aggregates from CPIS
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Canada: currency composition of international portfolio investment (debt)
USD trn
Source: IMF CPIS.
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Korea: currency composition of international portfolio investment (debt)
USD trn
Source: IMF CPIS.
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United States: currency composition of international portfolio investment (debt)
USD trn
Source: IMF CPIS.
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Germany: currency composition of international portfolio investment (debt)
USD trn
Source: IMF CPIS.
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Sweden: currency composition of international portfolio investment (debt)
USD trn
Source: IMF CPIS.
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Switzerland: currency composition of international portfolio investment (debt)
USD trn
Source: IMF CPIS.
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Japan: currency composition of international portfolio investment (debt)
USD trn
Source: IMF CPIS.
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Determinants of bond currency denomination
Borrower’s preferences Cash flows Invoicing currency
Investor’s (lender’s) preferences Domestic currency instruments to hedge bond-like
obligations in domestic currency
Availability of hedging Can meet domestic bond-like obligations while holding
foreign currency assets
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Considerations from hedging
Slope of yield curve matters, as well as interest rate differential EUR long-dated bonds give higher long-dated yields on a
hedged basis for some investors Hedging costs incurred at short rate; yields collected at long
rate EUR “Reverse Yankees” issued by US corporates in 2015-6
Hedging cost incorporates balance sheet utilisation cost Cross-currency basis (and failure of covered interest parity)
matters for returns on a hedged basis Dollar funding is a key issue
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Deviations from covered interest parity
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Avdjiev, Du, Koch and Shin (2017)
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Emerging market sovereign bonds
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Non-resident holdings of EME local currency sovereign bonds
40
30
20
10
0
Peru
So
uth
Afr
ica
Ind
on
esi
a
Mexi
co
Po
lan
d
Ru
ssia
Mala
ysia
Co
lom
bia
Eg
ypt
Tu
rkey
Ro
man
ia
Hu
ng
ary
Th
aila
nd
Bra
zil
Ch
ile
Lith
uan
ia
Latv
ia
Ph
ilip
pin
es
Ind
ia
Ch
ina
Bu
lgari
a
Ukr
ain
e
2016 Q4 2017 Q4
Source: World Bank
%
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Two duration measures
Duration = − / Compare duration measures with:
Percentage return in local currency terms Percentage return in dollar terms
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Percentagereturn
Yield change0
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EMEs local currency sovereign bonds performance1, January 2013 – October 2018
1Total return on bonds denominated in local currency as weekly change in JPMorgan GBI-EM principal return index in local currency and US dollar. Sources: JPMorgan Chase; BIS calculations.
Mexico South Africa
y = -0.06 -12.4xwhere R2 = 0.58
y = -0.01 -5.05xwhere R2 = 0.88
–10
–5
0
5
–0.5 0.0 0.5 1.0
Local currency return
Change in yield, in percentage points
Retu
rn, i
n pe
rcen
t
y = -0.02 -12.8xwhere R2 = 0.70
y = 0.03 -4.59xwhere R2 = 0.94
–10
–5
0
5
–0.5 0.0 0.5 1.0
US dollar return
Change in yield, in percentage points
Retu
rn, i
n pe
rcen
t
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EMEs local currency sovereign bonds performance1, January 2013 – October 2018
1Total return on bonds denominated in local currency as weekly change in JPMorgan GBI-EM principal return index in local currency and US dollar. Sources: JPMorgan Chase; BIS calculations.
Indonesia Brazil
y = -0.09 -6.6xwhere R2 = 0.60
y = -0.01 -4.52xwhere R2 = 0.88
–10
–5
0
5
–0.5 0.0 0.5 1.0
US dollar return
Change in yield, in percentage points
Retu
rn, i
n pe
rcen
t
y = -0.11 -8.52xwhere R2 = 0.66
y = 0.04 -4.34xwhere R2 = 0.93
–10
–5
0
5
–0.5 0.0 0.5 1.0
US dollar return
Change in yield, in percentage points
Retu
rn, i
n pe
rcen
t
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Advanced economies sovereign bond indices1, January 2013 – October 2018
1 GBI Global Country 5 to 7 year maturity indices for the selected economies.
Sources: JPMorgan Chase; BIS calculations.
France Sweden
y = -0.06 -2.67xwhere R2 = 0.02
y = -0.03 -5.41xwhere R2 = 0.96
–4
–2
0
2
–0.2 –0.1 0.0 0.1 0.2 0.3
Local currency return
Change in yield, in percentage points
Retu
rn, i
n pe
rcen
t
y = -0.12 -1.91xwhere R2 = 0.01
y = -0.03 -5.09xwhere R2 = 0.94
–6
–4
–2
0
2
–0.2 –0.1 0.0 0.1 0.2 0.3
US dollar return
Change in yield, in percentage points
Retu
rn, i
n pe
rcen
t
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KRW sovereign bonds1, January 2013 – October 2018
y = -0.03 -9.62xwhere R2 = 0.27
y = -0.01 -6.78xwhere R2 = 0.98
–10
–5
0
5
–0.5 0.0 0.5 1.0
Local currency returnChange in yield, in percentage points
Retu
rn, i
n pe
rcen
t
y = -0.03 -9.62xwhere R2 = 0.27
y = -0.01 -6.78xwhere R2 = 0.98
–5.0
–2.5
0.0
2.5
–0.3 –0.1 0.1 0.3 0.5
US dollar returnChange in yield, in percentage points
Retu
rn, i
n pe
rcen
t
Korea Korea
1Total return on bonds denominated in local currency as weekly change in JPMorgan JADE Index principal return index in local currency and US dollar. Sources: JPMorgan Chase; BIS calculations.
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Some lessons
Lenders prefer bonds in domestic currency Pension funds, life insurance companies want bonds to
service bond-like obligations in domestic currency Borrowers are subject to “original sin”, old and new
Corporates who borrow in dollars do so from foreigners Sovereigns can borrow in local currency from foreigners but
EMEs are subject to fluctuations in global risk appetite International currencies
USD retains primary role Other global currencies nevertheless exert significant
presence