Threshold Effects of Foreign Holdings on ASEAN Sovereign Bond Yields
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Bond Yields, Foreign Participation, Government Bonds, Market Liquidity, Policy Interventions
Abstract
Research Originality — This study uniquely examines the non-linear effect of foreign ownership on sovereign bond yields in Indonesia, Malaysia, Thailand using a Panel Threshold Regression (PTR) model to identify specific inflection points, while differentiating from previous studies by accounting for market liquidity and foreign reserves.
Research Objectives — This study aims to empirically assess the impact of foreign participation on 10-year government bond yields, determine the threshold levels altering this relationship, and evaluate whether market liquidity and foreign reserves act as transmission channels or risk buffers.
Research Methods — Using quarterly panel data for Indonesia, Malaysia, and Thailand over the period 2009-2023, the empirical approach combines fixed-effect regression to capture baseline relationships with PTR to account for regime-dependent effects.
Empirical Results — Findings reveal a strong non-linear negative influence of foreign investments on interest rates, with a critical threshold established at 10.2%. Below this cut-off, interest rates are highly sensitive and prone to rise, indicating market vulnerability, whereas an increase above this value effectively lowers interest rates.
Implications — Contributing to the Term Structure of Interest Rate literature, this study demonstrates that emerging market bond dynamics are driven more by investor confidence than short-term instruments. Policymakers must maintain foreign participation within an optimal range to prevent sudden capital outflows and ensure market stability.
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