The role of different institutional investors in Asia-Pacific bond markets during the taper tantrum

Emerging markets have grown rapidly over the past two decades, and sovereign and corporate borrowers are increasingly reliant on bond financing. Given widespread concern over what will happen to emerging market bonds as central banks in major advanced economies start to unwind quantitative easing policies and raise interest rates, this paper examines the behaviour of different investors buying and selling emerging market government and corporate bonds around the 2013 taper tantrum. Using detailed security-level data on bond holdings by institutional investors from Thomson Reuters eMAXX, we find that mutual funds – which are subject to outflow pressures – tended to liquidate their bond holdings of emerging Asian bond markets, while insurance companies, annuities and pension funds – all of which are not subject to outflow pressures – bought extra bonds in these markets. We also find some evidence of global retrenchment during the taper tantrum. In particular, local (Asiadomiciled) funds bought emerging Asian bonds, and global (US-, UK- and Europedomiciled) funds sold these bonds. These results suggest that policymakers need to foster a stable domestic investor base and make efforts to better understand the behaviour and incentives of different bond investors.