Price Pressure in the Government Bond Market: Long-term Impact of Short-term Advice

Abstract

This paper analyzes the systemic impact of massive pension funds' portfolio reallocations triggered by a financial advisory firm. We analyze the main channels by which government yields are affected and trace their impact on households and firms' financing costs. We document significant and persistent price pressure in the domestic government bond market after portfolio switching recommendations. Further, we find persistent changes in government yields, particularly in long-term inflation-linked bond yields, triggered by changes in the term premium component. Consistent with the relevance of inflation-linked bonds as the primary benchmark in setting interest rates, we find a substantial impact on firms' and households' financing costs.