Strategic Debt Management: How Governments Manipulate Bond Market Perceptions

• In Event: Sovereign Debt, Public Perceptions, and Global Norms

Abstract

This paper explores how governments market their sovereign debt. Specifically, we investigate the extent to which governments attempt to position themselves as part of a certain peer group. While the pricing of sovereign bonds is largely the result of a government’s ability and willingness to pay, recent research indicates that investors’ categorization of a government (into a specific group, such as “Latin America” or “frontier markets”) also affects the pricing of sovereign risk. We focus on the interactions government debt management offices (DMOs) with private sector investors. DMOs engage with potential investors via “road show” presentations, offering information about their country’s economic and political fundamentals. These provide an opportunity for governments to attempt to manipulate investor perceptions of their peer group categorization. We expect that some governments will compare themselves with aspirational peers: governments that want to improve perceptions of creditworthiness may compare their economic performance to lower-risk, higher-status sovereign borrowers. In other situations, DMOs may seek to project higher status by comparing their government higher risk countries in the region. We test our expectations by coding a wide set of DMOs’ investor presentations, during the 2013-2018 period. We then use network analyses to assess how and to what extent states compare themselves within and across regions, credit rating, and income categories. We identify the endogenous attributes of the presentation network. Our analyses suggest that, indeed, DMOs vary markedly in the “peers” they reference, and that these references are sometimes aspirational, and at other times more competitive. Our analyses draw attention to the role of debt management offices, as well as to the active role governments – including those in emerging and frontier markets – play in attempting to manage investor perceptions.

Authors

• Layna Mosley, Princeton University

• Jared Falkenberg Edgerton, Ohio State University

• Sarah M. Brooks, Ohio State University