Abstract
Foreign financial institutions increasingly dominate safe asset markets, yet their impact remains underexplored. Using daily transaction-level data from Israel’s sovereign bond market, we identify granular shocks from foreign institutions’ idiosyncratic trades. A 10-percentage-point rise in their holdings raises short-term safe asset convenience yields by 8.7 basis points and explains 40% of yield variation. Effects propagate: longer-term convenience yields rise 8.1 bps, corporate spreads fall 31.6 bps, equities gain 5.7%. Domestic mutual funds amplify spillovers by rebalancing into risky assets. Foreign flows reshape safe asset pricing, weaken monetary transmission, and reprice risk across markets.
JEL classification: E0, F0, F3, G2
Keywords: Convenience Yield; Monetary Policy Transmission; Capital Inflow Shock; Foreign Financial Institutions; Policy Interest Rates; Market Interest Rates; Portfolio Rebalancing; Granular Instrumental Variable; Slow-Moving Capital; Covered Interest Parity Arbitrage.