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.
Old age dependency ratio Ratio of population 65+ per 100 population 15-64 1 1 Forecast based on the medium fertility variant, 2015-2100 Source: United Nations 2
Old age dependency ratio Ratio of population 65+ per 100 population 15-64 1 1 Forecast based on the medium fertility variant, 2015-2100 Source: United Nations 3
Working age population 1 As a percentage of total population, % 1 Calculated as population 15 to 65, as a share of total population. Source: United Nations. 4
Pension funds and insurance corporations Financial assets USD trn Debt securities USD trn 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 5
Debt securities of pension funds and insurance corporations Pension funds 1 Insurance corporations 2 In per cent of GDP In per cent of GDP 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. 6
Currency denomination of portfolio assets Borrowers Investors A L A L A s currency Country A 7
Finding 1: lenders tend to lend in their own currency Borrowers A L Investors A L A L Country A A s currency Maggiori, Neiman and Schreger (2018) International currencies and capital allocation https://scholar.harvard.edu/maggiori/publications/unpacking-global-capital-flows-micro-dataapproach-macro-facts 8
Finding 2: corporate borrowers are subject to original sin ; when borrowing from abroad, they do so in foreign currency Borrowers A L Investors A L A L Country A A s currency A L 9
Finding 3: exception is the United States and the US dollar Borrowers A L Investors A L A L USA US dollar A L 10
Canadian corporate bond issuance Maggiori, Neiman and Schreger (2018) 11
US corporate bonds issuance Maggiori, Neiman and Schreger (2018) 12
Possible mechanisms 13
Liabilities side of lender s balance sheet looms into view Borrowers A L A L Investors A L Country A Pension funds and life insurers have bond-like obligations; they want assets that back them up A s currency A L 14
Banking sector facilitates currency hedging Borrowers A L Investors A L A L USA US dollar Currency hedging allows lenders to convert green into red A L 15
US dollar-denominated cross-border bank claims are mostly to do with non-us advanced economies By residence USD trn By nationality USD trn Source: BIS locational banking statistics. USD denominated cross border claims by residence and by nationality 16
Euro-denominated cross-border bank claims are mostly focused on the euro area By residence USD trn By nationality USD trn Source: BIS locational banking statistics. 17
Evidence on aggregates from CPIS 18
Canada: currency composition of international portfolio investment (debt) USD trn Source: IMF CPIS. 19
Korea: currency composition of international portfolio investment (debt) USD trn Source: IMF CPIS. 20
United States: currency composition of international portfolio investment (debt) USD trn Source: IMF CPIS. 21
Germany: currency composition of international portfolio investment (debt) USD trn Source: IMF CPIS. 22
Sweden: currency composition of international portfolio investment (debt) USD trn Source: IMF CPIS. 23
Switzerland: currency composition of international portfolio investment (debt) USD trn Source: IMF CPIS. 24
Japan: currency composition of international portfolio investment (debt) USD trn Source: IMF CPIS. 25
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 26
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 27
Deviations from covered interest parity Avdjiev, Du, Koch and Shin (2017) 28
Emerging market sovereign bonds 29
Non-resident holdings of EME local currency sovereign bonds % 40 30 20 10 0 Peru South Africa Indonesia Mexico Poland Russia Malaysia Colombia Egypt Turkey Romania Hungary Thailand Brazil Chile Lithuania Latvia Philippines India China Bulgaria Ukraine Source: World Bank 2016 Q4 2017 Q4 30
Two duration measures Duration = / Compare duration measures with: Percentage return in local currency terms Percentage return in dollar terms 31
Percentage return 0 Yield change 32
EMEs local currency sovereign bonds performance 1, January 2013 October 2018 Mexico South Africa y = -0.06-12.4x where R 2 = 0.58 y = -0.01-5.05x where R 2 = 0.88 10 0.5 0.0 0.5 1.0 Change in yield, in percentage points Local currency return 5 0 5 Return, in percent y = -0.02-12.8x where R 2 = 0.70 y = 0.03-4.59x where R 2 = 0.94 10 0.5 0.0 0.5 1.0 Change in yield, in percentage points US dollar return 5 0 5 Return, in percent 1 Total 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. 33
EMEs local currency sovereign bonds performance 1, January 2013 October 2018 Indonesia Brazil y = -0.09-6.6x where R 2 = 0.60 y = -0.01-4.52x where R 2 = 0.88 10 0.5 0.0 0.5 1.0 Change in yield, in percentage points US dollar return 5 0 5 Return, in percent y = -0.11-8.52x where R 2 = 0.66 y = 0.04-4.34x where R 2 = 0.93 10 0.5 0.0 0.5 1.0 Change in yield, in percentage points US dollar return 5 0 5 Return, in percent 1 Total 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. 34
Advanced economies sovereign bond indices 1, January 2013 October 2018 France y = -0.06-2.67x where R 2 = 0.02 y = -0.03-5.41x where R 2 = 0.96 0.2 0.1 0.0 0.1 0.2 0.3 Change in yield, in percentage points Local currency return 2 0 2 4 Return, in percent Sweden y = -0.12-1.91x where R 2 = 0.01 y = -0.03-5.09x where R 2 = 0.94 0.2 0.1 0.0 0.1 0.2 0.3 Change in yield, in percentage points US dollar return 2 0 2 4 6 Return, in percent 1 GBI Global Country 5 to 7 year maturity indices for the selected economies. Sources: JPMorgan Chase; BIS calculations. 35
KRW sovereign bonds 1, January 2013 October 2018 Korea Korea y = -0.03-9.62x where R 2 = 0.27 y = -0.01-6.78x where R 2 = 0.98 5 0 5 10 0.5 0.0 0.5 1.0 Change in yield, in percentage points Local currency return Return, in percent y = -0.03-9.62x where R 2 = 0.27 y = -0.01-6.78x where R 2 = 0.98 2.5 0.0 2.5 5.0 0.3 0.1 0.1 0.3 0.5 Change in yield, in percentage points US dollar return Return, in percent 1 Total 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. 36
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 37