The Long and the Short of Emerging Market Debt

Abstract

Emerging economies have tried to promote long-term debt since it reduces maturity mismatches and the probability of crises. This paper uses unique evidence from the leading case of Chile to study to what extent there is domestic demand for long-term instruments. We analyze monthly asset-level portfolios of Chilean institutional investors (mutual funds, pension funds, and insurance companies) and compare their maturity structure to that of US bond mutual funds. Despite being thought to invest long term, Chilean asset-management institutions (mutual and pension funds) hold large amounts of short-term assets relative to US mutual funds and Chilean insurance companies. Shorttermism is not driven by lack of instrument availability or tactical behavior. Instead, it seems to be explained by the desire to minimize inflation risk and, more importantly, by manager incentives that tilt demand toward short-term instruments. Extending the maturity of emerging market debt may require reducing risk and reshaping investor incentives. JEL Classification Codes: F36, G11, G20, O16

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“…On the contrary, they select the same assets at the same time from a wide range of alternatives. Similar conclusions can be reached if one looks at the auctions of government paper and the biddings by PFAs in those public offerings (Opazo et al, 2009).…”

“…The results suggest then that part of the herding in government bonds is driven by PFAs purchasing those securities for several of their funds. In fact, PFAs participate actively in government bond auctions, demanding a significant proportion of the securities that come to markets (Opazo et al, 2009).…”

“… See Arrau and Chumacero (1998),Zurita (1999),IMF and World Bank (2004),Olivares (2005),Yermo (2005),Berstein and Chumacero (2006), and The Economist (2008).8 Moreover, pension funds invest heavily short term Opazo et al (2009). show that Chilean pension fund portfolios are short term relative to those of insurance companies and US mutual funds.…”

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