The investor base for sovereign debt: Recent developments and potential implications

Long-term sovereign bond yields have risen as fiscal pressures mount and central banks step back from bond markets. With private investors playing a larger role, borrowing costs may remain higher and markets may become more volatile, raising important questions for debt management and financial stability.

By Masatoshi Ando, Ben Conigrave, Álvaro Pina and Caroline Roulet, OECD Economics Department.

By Masatoshi Ando, Ben Conigrave, Álvaro Pina and Caroline Roulet, OECD Economics Department.

Long-term sovereign bond yields have risen in recent years and the spread between 30- and 10-year bond yields has widened (Figure 1, Panel A). This reflects investor concerns about the sustainability of public debt given persisting budget imbalances in many advanced economies and rising spending pressures from defence, ageing and climate change. At the same time, as discussed in the December 2025 OECD Economic Outlook, there have been marked changes in the mix of investors purchasing government bonds since the pandemic. These changes in the investor base likely contribute to the upward pressure on yields and may also be a source of future market volatility.

One key factor has been the shift from quantitative easing to quantitative tightening by the major central banks. The balance sheets of central banks expanded after the onset of the global financial crisis, and were boosted significantly further during the pandemic, primarily through sovereign debt purchases. More recently, with the shift to quantitative tightening in many jurisdictions, central banks have reduced their sovereign bond holdings either passively, by not reinvesting maturing securities, or by actively selling bonds. The share of total outstanding domestic sovereign debt held by the central bank is now largely back to pre-pandemic levels, including in the United States and the euro area (Figure 1, Panel B).

Figure 1. Long-term yields have risen and central bank bond holdings have shrunk

Note: Panel A shows weekly data, with the latest observation dated 20 February 2026. In panel B, ECB denotes the European Central Bank, US Fed the US Federal Reserve, BOC the Bank of Canada, and RBA the Reserve Bank of Australia. Domestic sovereign bonds held by central banks at the end of each year are expressed as a share of total domestic sovereign bonds outstanding. Data for 2025 data refer to Q3.
Source: Australian Bureau of Statistics; Bank of Canada; European Central Bank; Federal Reserve; Reserve Bank of Australia; Statistics Canada; LSEG; and OECD calculations.

A counterpart to this is that the private sector has absorbed a rising share of new bond issuance, with the composition of investors becoming more dispersed and heterogenous (Figure 2). Over the year to 2025Q3 there were higher net purchases relative to GDP by banks and money market funds in all four economies displayed, and by other financial intermediaries such as investment funds and securities dealers in Australia, the euro area and the United States. In contrast, net purchases of sovereign bonds by traditional institutional investors, including pension funds and insurers, often declined relative to GDP.

The shift in the balance of sovereign bond purchases from central banks to price-sensitive private sector investors could affect the required rate of return on sovereign bonds (OECD, 2025; IMF, 2025). Yields might be more elevated to sustain demand for government debt in coming years, particularly in countries where fiscal trajectories may be viewed as unsustainable, pushing up the cost of government borrowing.

A related risk is that sovereign bond markets become more volatile. Some non-bank financial institutions have comparatively light regulatory frameworks, allowing them to operate with higher leverage. An example is hedge funds, which have been playing a growing role in the sovereign debt markets of many countries, including the US. High leverage could reduce their capacity to absorb new bond issuance at times of market stress due to a need for higher liquidity to meet potential investor redemptions and to offset changes in the value of their existing collateral (ECB, 2023; Sengupta and Jacobs, 2025). Higher bond market volatility may itself raise liquidity needs due to margin calls or redemptions from leveraged investment funds, potentially forcing asset sales including sovereign bonds.

Reforms affecting pension funds and associated financial intermediaries, coupled with a more uncertain environment, will also reduce the demand for very long-term bonds. For example, UK regulatory adjustments for liability-driven investment (LDI) funds introduced after the 2022 gilt market dislocation (LDI funds allow pension funds to match the interest sensitivity of their assets and liabilities through the use of derivatives) — including tighter leverage limits, higher liquidity buffers, and more conservative collateral management practices — reduced their capacity to maintain large, leveraged positions in long-dated gilts (BIS, 2025). In Japan, higher yields and elevated policy uncertainty have made life insurers moderate their demand for very long‑term sovereign bonds, at least temporarily (Reuters, 2025). The shift from defined benefit to defined contribution schemes in countries such as the Netherlands and the United Kingdom has also reduced the emphasis on duration matching of fixed liabilities for pension funds, diminishing their demand for long-term sovereign bonds (PIMCO, 2023).

For a given maturity distribution of debt issuance, such reforms potentially raise yields and volatility at the long end of the yield curve, though the increasing demand for safer assets such as government bonds from funded pension systems as the population ages will have the opposite impact. Some debt management offices have also shifted issuance toward shorter maturities to mitigate rising interest expenditures, although this may heighten refinancing risks and governments’ sensitivity to fluctuations in short‑term interest rates.

Figure 2. Net purchases of sovereign bonds by investor type in selected advanced economies

Quarterly averages

Note: The figure shows net purchases of general government debt securities of all maturities, consolidated to eliminate intra-government transactions. Quarterly averages are presented for three periods: the latest quantitative easing (QE) episode, the subsequent period of quantitative tightening (QT), and the most recent four quarters with available data for all four jurisdictions (which often overlaps the QT period). QE and QT periods follow central bank announced implementation dates. When both QE and QT take place in the same quarter, none is retained unless one clearly outweighs the other. “Other financial intermediaries” include non-money market investment funds (among which hedge funds), securities dealers and non-bank money lenders. “Institutional investors” refers to insurance companies and pension funds. “Real sectors” encompass households, non-profit organisations, and non-financial corporations. Data are seasonally adjusted and expressed as a share of contemporaneous quarterly GDP. For the United States, net purchases by households are likely overstated, and those by foreign hedge funds (included in the rest of the world) concomitantly understated, since 2023 (Barth et al., 2025).
Source: Australian Bureau of Statistics; European Central Bank; Federal Reserve; Statistics Canada; OECD National Accounts Databases; and OECD calculations.

References

BIS (2025), BIS Quarterly Review, September, Bank for International Settlements.

Barth, D., Beltran, D., Hoops, M., Kahn, J., Liu, E., and M. Perozek (2025), The Cross-Border Trail of the Treasury Basis Trade, Federal Reserve Board of Governors, FEDS Notes, October.

ECB (2023), Financial Stability Review, November 2023.

IMF (2025), “Shifting ground beneath the calm: Stability challenges amid changes in financial markets”, Global Financial Stability Report, October, International Monetary Fund, Washington D.C.

OECD (2025), Global Debt Report 2025: Financing Growth in a Challenging Debt Market Environment, OECD Publishing, Paris.

Pimco (2023), The End of the Dutch Defined Benefit Model A Steeper Euro Swap Curve Ahead, July.

Reuters (2025), Japan’s major life insurers plan to trim yen bond holdings in Oct-March, October.

Sengupta, R. and J. Jacobs (2025), The Changing Investor Composition of U.S. Treasuries, Part 2: Who’s Buying U.S. Treasuries?, Economic Bulletin, Federal Reserve of Kansas City, July.