Consequences of ageing for international finance€¦ · 1Total return on bonds denominated in...

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.

2

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

3

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

4

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.

5

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

6

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

Currency denomination of portfolio assets

7

Borrowers Investors

A LA L

Country A

A’s currency

8

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

9

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

10

Finding 3: exception is the United States and the US dollar

BorrowersA L

Investors

A LA L

US dollarUSA

A L

11

Canadian corporate bond issuance

Maggiori, Neiman and Schreger (2018)

12

US corporate bonds issuance

Maggiori, Neiman and Schreger (2018)

13

Possible mechanisms

14

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

15

Banking sector facilitates currency hedging

BorrowersA L

Investors

A LA L

US dollarUSA

A LCurrency hedgingallows lenders to

convert green into red

16

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

17

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

18

Evidence on aggregates from CPIS

19

Canada: currency composition of international portfolio investment (debt)

USD trn

Source: IMF CPIS.

20

Korea: currency composition of international portfolio investment (debt)

USD trn

Source: IMF CPIS.

21

United States: currency composition of international portfolio investment (debt)

USD trn

Source: IMF CPIS.

22

Germany: currency composition of international portfolio investment (debt)

USD trn

Source: IMF CPIS.

23

Sweden: currency composition of international portfolio investment (debt)

USD trn

Source: IMF CPIS.

24

Switzerland: currency composition of international portfolio investment (debt)

USD trn

Source: IMF CPIS.

25

Japan: currency composition of international portfolio investment (debt)

USD trn

Source: IMF CPIS.

26

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

Deviations from covered interest parity

28

Avdjiev, Du, Koch and Shin (2017)

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Emerging market sovereign bonds

30

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

32

Percentagereturn

Yield change0

33

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

34

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

35

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

36

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