The investor base for sovereign debt: Why diversification matters

Sam Foxall and Jeffrey Gao

No 2026-29, Staff Analytical Papers from Bank of Canada

Abstract: Sovereign borrowing is rising, just as central banks are stepping back. Meanwhile, commercial bank holdings of sovereign bonds remain well below pre-global financial crisis levels. This leaves foreign investors and investment funds, often hedge funds, to absorb more of this growing supply. Their greater involvement supports liquidity and robust auction results, but it can also concentrate risk: in stressed markets, correlated deleveraging and fast outflows can translate volatility into higher funding costs, reinforcing the case for investor base diversification.

Keywords: Financial markets and funds management; Funds management; Market functioning; Market structure; Financial system; Financial institutions and intermediation (search for similar items in EconPapers)
JEL-codes: G18 G28 H63 (search for similar items in EconPapers)
Date: 2026-06
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocsap:26-29

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