Credit Easing versus Quantitative Easing: Evidence from Corporate and Government Bond Purchase Programs

Using security-level data on individual corporate bond prices and the Bank of England’s published purchase quantities across its gilt purchase programs (QE1: £200bn, QE2: £125bn, QE3: £50bn, QE4: £60bn) and Corporate Bond Purchase Scheme (CBPS: £10bn of investment-grade sterling corporate bonds), this paper estimates supply effects of QE and CE on UK corporate bond prices, credit spreads, and new issuance separately, exploiting cross-sectional variation in quantities purchased as identifying variation via an instrumental variables approach. In the case of QE alone, supply effects on corporate bond prices are significant at announcement and larger over the full stock-effect horizon, but pass-through to credit spreads is found to be limited to the default-free component of corporate yields under normal market conditions — an exception is QE1 during the financial crisis, when QE’s cross-asset supply effects also significantly lowered credit spreads in the longer run. CE via the CBPS is found to be more effective than QE in reducing credit spreads for higher-rated investment-grade bonds even under normal conditions, and is the only program that generates a statistically significant increase in sterling corporate bond issuance. The results are consistent with QE and CE working through partially distinct channels — QE primarily affecting the default-free component of corporate yields, CE additionally compressing the credit-spread component — and complementing each other for higher-rated bonds.

The Federal Reserve's Large-Scale Asset Purchase Programmes: Rationale and Effects

This 2012 Economic Journal paper by D’Amico, English, López-Salido, and Nelson estimates how the Federal Reserve’s large-scale asset purchase (LSAP) programmes of 2008-2011 lowered longer-term US Treasury yields, disaggregating the total effect into three transmission channels within a single unified empirical framework that nests all of them: an expectations/signalling channel (LSAPs convey information about the future path of short-term policy rates, operating purely through the expectations hypothesis of the term structure, with no imperfect asset substitution required); a scarcity (preferred-habitat) channel (a Fed purchase withdraws a specific maturity from private holders, creating excess demand that depresses yields at that maturity and nearby ones because investors do not substitute perfectly across maturities); and a duration channel (Fed purchases remove aggregate duration risk from the market, lowering term premiums more broadly across the maturity spectrum). Using weekly CUSIP-level (individual-security) US Treasury data from December 2002 to October 2008 — a pre-LSAP estimation window chosen specifically to avoid endogeneity that contaminates the LSAP period itself, since the Fed tended to buy securities precisely when yields were rising — the authors regress yields and term-premium components on the fraction of privately held nominal Treasuries in a given maturity bucket (PHNT) and an aggregate duration-risk gap measure (DG), finding both coefficients positive and statistically significant across maturities from 7 to 30 years (adjusted R-squared of 0.46-0.70), a result that survives controlling for Treasury option-implied volatility, a flight-to-quality proxy, and a business-conditions index. Applying these pre-crisis coefficients to the actual scale and maturity concentration of the LSAP programmes, the authors estimate the first LSAP ($300 billion, concentrated in the 2-10 year sector) lowered longer-term Treasury yields by roughly 35 basis points (about 23bp from the scarcity channel plus 12bp from the duration channel), and the second LSAP ($600 billion) by roughly 45 basis points (about 35bp scarcity plus 10bp duration) — equivalent, using a standard rule-of-thumb conversion, to federal-funds-rate cuts of about 140 and 180 basis points respectively. A supporting intraday event study of the August 10, 2010 FOMC/FRBNY reinvestment announcement, together with the finding that scarcity and duration coefficients remain significant when controlling for proxies of expected short-rate paths, leads the authors to state that their results suggest LSAPs do not operate solely or even primarily via the expectations channel, and that preferred-habitat elements are a necessary ingredient for understanding monetary transmission to long-term rates even away from the zero lower bound (their pre-LSAP sample predates the ZLB period). The scope of the quantitative results is explicitly limited to nominal Treasury securities — the paper does not directly quantify the effects of the agency debt and MBS purchased in the first LSAP round — and rests on extrapolating relationships estimated in a short, pre-crisis, non-LSAP sample to the LSAP period, a limitation the authors themselves flag.

Stefania D'Amico | Macro Paper Warehouse

Credit Easing versus Quantitative Easing: Evidence from Corporate and Government Bond Purchase Programs

The Federal Reserve's Large-Scale Asset Purchase Programmes: Rationale and Effects