Where the bondholders are: indexes, pension funds, and investor bases in emerging markets

The extent to which sovereign investor bases include domestic or foreign residents varies across Emerging Markets (EMs). Bondholder residency has significant implications, but why EM investor bases vary in the first place has not been widely explored. A comparative case study of Colombia and Mexico finds that one global financial factor (bond index composition) and one domestic institutional factor (pension fund investment regulations) affect bondholder residency more directly than several other push-pull factors and domestic institutions. Globally, changes in the composition of benchmark bond indexes can drive large and rapid investor base shifts. Domestically, different pension fund investment regulations lead to divergent investor base trends over time. The study advances the sovereign debt literature, highlights the importance of index investment vis-à-vis other push factors, identifies indexes as a source of financial subordination, and clarifies an implication of financial repression for sovereign debt.