Effects of foreign participation in the colombian local public debt market on domestic financial conditions

Abstract

Since 2014 the Colombian local public bond market experienced a substantial increase in the participation of foreign investors due to a reduction of the tax rates on foreign portfolio investment returns and the increase in the weight of Colombia in the JP Morgan GBI-GD. Some evidence is presented suggesting that the resulting inflows reduced bond and loan interest rates and raised loan supply. There is also evidence of an increased sensitivity of local public bond yields to CDS and EMBI, although the influence of external financial conditions on domestic lending rates has remained subdued. Finally, no evidence is found of a shift in the transmission of domestic monetary policy shocks to public bond and lending interest rates after the increase in foreign participation in the local bond market.

Los Efectos de la Participación y Concentración de los Títulos de Deuda Pública en Colombia

“…He finds a permanent reduction of up to 98 basis points in the domestic 10-year sovereign bond. Finally, Romero et al (2020) show suggestive evidence that foreign inflows reduced government bond yields and raised loan supply.…”

Public debt in Colombia: a post-Keynesian and institutionalist analysis

“…Of particular importance is the increase of external public debt within the financial account during the crisis of 2014-2016, which is explained by the fact that in 2014 the JP Morgan GBI-EM index improved the qualification of Colombian bonds. This led to a massive amount of passive institutional investor funds inundating the local bond market (Romero et al, 2020).…”