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An unintended consequence of holding dollar assets

Robert Czech (), Shiyang Huang (), Dong Lou () and Tianyu Wang ()
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Shiyang Huang: University of Hong Kong
Dong Lou: London School of Economics
Tianyu Wang: Tsinghua University

No 953, Bank of England working papers from Bank of England

Abstract: We study investor trading behaviour and yield patterns in the UK government bond market during the recent Covid crisis. We show that the yield spike in mid-March 2020 was accompanied by heavy selling of gilts by UK-based insurance companies and pension funds (ICPFs), which we argue was an indirect result of the US dollar’s global prominence. Non-US institutions invest a large portion of their capital in dollar assets and hedge their dollar exposures by selling dollars forward through FX derivatives. In crisis periods, dollars appreciate against other currencies. To meet margin calls on these short-dollar FX positions, non-US institutions sell their domestic safe assets, thereby contributing to the yield spikes in domestic markets.

Keywords: Covid crisis; gilt yields; variation margin; FX derivatives; global reserve currency; currency hedging (search for similar items in EconPapers)
JEL-codes: F31 G11 G12 G15 G22 G23 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2021-12-10
New Economics Papers: this item is included in nep-cwa, nep-his, nep-ifn and nep-rmg
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Citations: View citations in EconPapers (3) Track citations by RSS feed

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