DM Sovereigns: The Still-Tentative Return of Nonresident Investors

Over the past decade, sovereign debt profiles in developed markets (DM) have shifted significantly, particularly in terms of the role of nonresident (NR) investors. The COVID pandemic’s onset caused flight-to-quality dynamics, while large central bank presence and low interest rates crowded out NR investors. Russia’s invasion of Ukraine and the related energy shock afflicting Europe kept nonresident participation relatively muted in the initial post-COVID period. The start of interest rate normalization in Japan created concerns that the large Japanese investor pool would repatriate investments home, although that trend is still nascent. Hedge funds have assumed a more active role in developed market sovereign financing. As central banks have pared their balance sheet holdings of government debt, the share of NR investors in the creditor mix has shown signs of rising across DMs. Creditor composition is a critical factor in debt analysis, and KBRA continues to monitor these trends. …