Investor Behavior Under Market Stress: Evidence from the Italian Sovereign Bond Market

Drawing on data from primary dealers, this analysis compares how different types of investors in Italian government bonds react to changes in past yields, and provides new evidence on the role played by non-banks, alongside banks. The analysis covers the seven-year period 2014‑2020, which includes episodes of severe market stress, such as the 2018 Italian market turmoil and the outbreak of the COVID-19 crisis in March 2020. The evidence shows that investors’ reactions to past yield changes differ consistently based on the sector to which they belong. Asset managers and hedge funds tend to respond procyclically to yield movements, i.e. they buy securities when prices rise (and vice versa), whereas banks do not, and thus they play a more stabilizing role on the market. Other non-bank investors, such as insurance companies, pension funds and non-financial entities, tend to have a muted response to past yield changes.