Yield-Oriented Investment Behaviour in Debt Security Markets
Authors: Puriya Abbassi (Bundesbank), Michael Schmidt (Goethe University)
Title: Yield-Oriented Investment Behaviour in Debt Security Markets
Abstract: How do yield-oriented fixed income investors allocate assets when long-term yields are low for long? We examine this question by exploiting bond portfolio allocations by all institutional investors and households in Germany at the security-level for 2005-2016. We find that investment funds, insurances together with pension funds, and households shift their portfolios towards longer-dated, riskier, and corporate bonds when long-term yields are low. We investigate two important consequences of these portfolio changes: First, we compute the portfolio Value at Risk and show that portfolios become more exposed to tail risk. Second, we see that the structure of the bond market changes and we exploit within security-bucket variation in bond yields to show that yields of bonds held by yield-oriented investors are more susceptible to a sudden switchback.