Reform of the Brazilian RGPS Pensions System

We assess the investor base impact on government borrowing costs and examine how investors react to shocks in sovereign bond yields, across 24 countries and 3 maturities between 2004Q1-2019Q2. Our VAR approach has the advantage of modelling bidirectional causality between yields and investor base. We find that higher foreign holdings are associated with lower yields but link these effects exclusively to foreign banks and mainly to 10-years maturity. Yields in GIIPS and EA core countries react in opposite directions to foreign holdings shocks. Foreign investment is procyclical, namely at the long end and where fundamentals are weaker. Thus, an EA sovereign debt crisis re-run cannot be dismissed requiring readiness to use supporting mechanisms to prevent contagion and an escalation that may jeopardize the monetary union itself. Yields’ response to domestic investment shocks is heterogeneous and seems to bear no significant relation with home bias. No cyclical trading pattern can be clearly associated to each type of domestic investor.