In sovereign bond markets, investors and credit ratings agencies are attentive to political events and institutions. Their assessments of default risk and creditworthiness hinge, in part, on elections: when elections generate uncertainty for investors, they can lead to increases in volatility and risk premiums. While political economists have analyzed election-related dynamics on the supply (creditor) side, they have paid scant attention to the demand (debtor government) side. We focus on the strategic behavior of borrowing governments: national debt management offices (DMOs) are aware of the impact of election-related uncertainty on financial markets. They seek to avoid the negative political consequences of market-induced financing problems. As such, debt managers avoid issuing short term and/or foreign currency-denominated debt that matures in the periods prior to elections (or avoid the bond market altogether), especially when the outcomes of those elections are uncertain. This provides some insulation for governments from market reactions to the electoral cycle. We exploit the exogeneity of the electoral cycle in presidential systems and a new dataset of issue-level features of government bonds to test our expectations. Our findings, based on data from 1990 to 2018, suggest that developing country borrowers often attempt to insulate themselves from market pressures, by avoiding the bond market during volatile times.
Discussant: Lucinda Cudzow (Oxford)