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Unconstrained multi-sector bond funds (MSBFs) can be a source of spillovers to emerging markets and potentially exert a sizable impact on cross-border flows. MSBFs have grown their investment in emerging markets in recent years and are highly concentrated-both in their positions and their decision-making. They typically also exhibit opportunistic behavior much more so than other investment funds. Theoretically, their size, multisector mandate, and unconstrained nature allows MSBFs to be a source of financial stability in periods of wide-spread market turmoil while others sell at fire-sale prices. However, this note, building on the analysis of Cortes and Sanfilippo (2020) and incorporating data around the COVID-19 crisis, finds that MSBFs could have contributed to increase market stress in selected emerging markets. When faced with large investor redemptions during the crisis, our sample of MSBFs chose to rebalance their portfolios in a concentrated manner, raising a large proportion of cash in a few specific local currency bond markets. This may have contributed to exacerbating the relative underperformance of these local currency bond markets to broader emerging market indices.

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Emerging economies in the post-crisis period increasingly saw portfolio debt inflows from a type of large international investment fund: Multi-Sector Bond Funds (MSBFs). These investors have lacked adequate representation in the literature. This paper constructs a new detailed database from micro-level MSBF emerging market (EM) holdings from 2009:Q4–2018:Q2. Exploiting this data, the paper assesses the risks they pose to the financial stability of specific emerging bond markets. The data shows that MSBFs are highly concentrated–both in their positions and their decision-making. The empirical results further suggest that MSBFs exhibit opportunistic behavior (and more so than other investment funds). In periods of high risk aversion, large MSBF portfolio reallocations out of EMs can be associated with underperformance of the same markets, signaling the importance of monitoring their footprint and better understanding their asset allocation decisions.

Finance: General --- Investments: Bonds --- Money and Monetary Policy --- Industries: Financial Services --- Current Account Adjustment --- Short-term Capital Movements --- Portfolio Choice --- Investment Decisions --- International Financial Markets --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- General Financial Markets: General (includes Measurement and Data) --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Finance --- Investment & securities --- Monetary economics --- Mutual funds --- Bonds --- Currencies --- Emerging and frontier financial markets --- Securities markets --- Financial institutions --- Money --- Financial markets --- Financial services industry --- Capital market --- United States

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This paper presents the Systemic Risk and Interconnectedness (SyRIN) tool. SyRIN allows a comprehensive assessment of systemic risk via quantification of the impact of risk amplification mechanisms, due to interconnectedness structures across banks and other financial intermediaries—insurance, pension fund, hedge fund and investment fund sectors, which cannot be captured when analyzing sectors independently. The tool produces various metrics to evaluate systemic risk from complementary perspectives, including tail risk, cross-entity interconnectedness and the contribution to systemic risk by different entities and sectors. SyRIN is easily implementable with publicly available data and can be adapted to cater to different degrees of institutional granularity and data availability. The framework is designed to be a tool to identify vulnerabilities from a top-down perspective that can lead to deeper analysis in specific sectors for policy formulation.

Risk assessment --- Analysis, Risk --- Assessment, Risk --- Risk analysis --- Risk evaluation --- Evaluation --- Data processing. --- Banks and Banking --- Finance: General --- Industries: Financial Services --- Mathematical Methods --- Econometric and Statistical Methods: Other --- Model Evaluation and Selection --- Optimization Techniques --- Programming Models --- Dynamic Analysis --- Business Fluctuations --- Cycles --- Interest Rates: Determination, Term Structure, and Effects --- Financial Markets and the Macroeconomy --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- General Financial Markets: Government Policy and Regulation --- Finance --- Banking --- Mutual funds --- Insurance companies --- Systemic risk --- Commercial banks --- Hedge funds --- Financial institutions --- Financial sector policy and analysis --- Financial risk management --- Banks and banking --- Financial services industry --- United States