Media Briefings

QUANTITATIVE EASING: New evidence of the impact on bond yields

  • Published Date: May 2014

New Bank of England research adds further weight to the view that central bank asset purchases (‘quantitative easing’ or QE) can affect government and corporate bond yields. In particular, the study, which is published in the May 2014 issue of the Economic Journal, finds evidence that QE works by reducing the supply of government bonds remaining in the private sector – what are known as ‘local supply effects’.

These local supply effects seem to be important: according to the researchers’ estimates, a £75 billion increase in asset purchases by the Bank of England through this channel would reduce government bond yields by around 0.25 percentage points in the UK (around half of the total impact of QE on government bond yields in the events examined).

Importantly, the study finds that this channel operated during both the initial period of purchases in 2009 and after purchases had restarted in 2012. So the strength of this channel of QE does not appear to have diminished over time.

When QE was first introduced in the UK, it was not widely anticipated and so the immediate market reaction to the Monetary Policy Committee’s announcements could be used to estimate the impact on government bond yields. Over time, however, market participants have begun to anticipate QE, based on economic news and data releases, making it harder to identify its impact from the market reaction.

The new study uses a novel way of overcoming part of this identification problem, using natural experiments associated with operational changes made by the Bank of England. These changes contained news about how future government bond purchases were likely to be distributed across bonds of different maturities.

A study of these events can therefore help to determine the impact on a bond’s yield when there is a change in the amount of that bond that is expected to be purchased. This can then be generalised to estimate the impact of changes in the total amount of asset purchases on government bond yields.

The researchers find that an increase in the amount of purchases expected within a particular maturity range can drive up the prices of those bonds and lower their yields. This is consistent with local supply effects – that is, where changes in the remaining supply of particular government bonds in the private market can cause changes in yields, because some investors do not view bonds of different maturities as perfect substitutes.

These local supply effects appear to explain a significant part of the total impact of QE on government bond yields. The estimates suggest that through this channel a £75 billion increase in asset purchases would reduce government bond yields by around 0.25 percentage points. This is around half of the total impact of QE on government bond yields in the events examined.

There is also evidence that these effects are passed through to yields in other, related markets, such as index-linked gilts and investment grade corporate bonds. This suggests that the study is not just identifying effects related to frictions in the government bond market.

These effects were operating and broadly similar in strength for each of the operational changes studied – in March 2009, August 2009 and February 2012. These events span both the initial period of purchases in 2009 and when purchases had restarted in 2012. Therefore the strength of the local supply channel of QE does not appear to have diminished over time, and was not just a reflection of market stress or dislocation in the immediate wake of the financial crisis.

ENDS


Notes for editors: ‘Using Changes in Auction Maturity Sectors to Help Identify the Impact of QE on Gilt Yields’ by Nick McLaren, Ryan Banerjee and David Latto is published in the Conference issue of the Economic Journal.

Nick McLaren and David Latto are at the Bank of England. Ryan Banerjee is at the Bank for International Settlements.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).