Credit Easing versus Quantitative Easing: Evidence from Corporate and Government Bond Purchase Programs
What this paper finds — and why it matters
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.
Summary of a forthcoming paper, AI-assisted and human-reviewed. See the linked original for the authoritative claims and full conditions.
Q1. What is the empirical strategy and why use a security-level approach?
The paper uses a two-stage instrumental variables (IV) approach at the individual corporate bond level, with pre-program bond characteristics — maturity, yield-curve fitting errors, the BoE’s prior ownership share in the gilt bucket — serving as instruments for the expected distribution of purchases across bonds, allowing isolation of the supply channel from signaling and duration channels. The security-level approach offers three advantages over aggregate or event-study methods: it enables construction of “substitute buckets” (bonds whose maturity is close to the purchased bonds’) to estimate cross-asset supply effects; it permits direct comparison of the price elasticity with respect to gilt purchases (cross-asset effect) versus corporate bond purchases (within-asset effect); and it allows estimation of both the announcement-day effect and the stock effect — the cumulative price and spread change over the life of each program — which captures the longer-run portfolio-rebalancing contribution separately from the initial market reaction.
Q2. What are QE’s effects on corporate bond prices and credit spreads?
For QE alone (QE1–3), the instrumented gilt substitute purchases have positive and statistically significant effects on corporate bond prices at announcement across all three programs — in the case of QE1, the average 30 basis-point decline in corporate yields on the announcement day is attributed in full to QE supply effects in the paper’s regression. The stock effect — estimated over the full life of each program — is significantly larger than the announcement-day effect, consistent with gradual portfolio rebalancing as predicted by Greenwood, Hanson, and Liao (2018). However, except for QE1, the supply effects do not carry through to credit spreads in either the short run or the longer run, which the paper interprets as consistent with QE working primarily through the default-free component of the corporate yield: corporate yields fell in line with gilt yields, but spreads over gilts were unchanged.
Q3. When does QE affect credit spreads?
QE1’s cross-asset supply effects significantly lowered credit spreads in the longer run, even though QE2 and QE3 do not generate significant credit spread compression in either the short or long run, suggesting that the supply channel interacts with the liquidity channel specifically under conditions of financial market distress. The paper interprets the QE1 exception as reflecting the severe disruption during the 2008–09 financial crisis: when capital mobility across markets is constrained and liquidity premia are elevated, central bank purchases of safe assets may also improve trading conditions in indirectly targeted, less liquid markets such as the corporate bond market, reducing the liquidity component of corporate spreads. This interaction does not appear to be operative in the more normal market conditions of QE2 and QE3.
Q4. How does CE compare to QE in reducing credit spreads and stimulating issuance?
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 financial market conditions, and a corporate bond’s price sensitivity to its own CBPS purchases is substantially higher than its price sensitivity to gilt substitute purchases; CE is also the only program with a statistically significant positive effect on new sterling corporate bond issuance. Across QE1–3, there is no statistically significant impact of gilt purchases on sterling corporate issuance, while CBPS purchases have positive and statistically significant effects on new sterling corporate bond issuance. The paper characterizes CE and QE as complementary for higher-rated bonds: CE’s credit-spread reduction layers on top of QE’s default-free component effect, making the total stock effect larger than either program alone.
Q5. What happens for lower-rated investment-grade bonds?
For lower-rated investment-grade bonds, the evidence for both cross-asset QE supply effects and within-asset CE supply effects is weaker, and the paper suggests that CE’s stimulation of new bond issuance may have counterbalanced its positive price effects for these bonds through the dilutive effect of new supply. The mechanism is that CE’s reduction in the cost of corporate bond issuance for lower-rated firms induced enough new bond issuance to partially offset the price increase from CBPS purchases, consistent with the issuance channel being most active for the market segment where CBPS created the largest pricing improvement. This dilution effect implies that the net price benefit of CE for lower-rated bonds is smaller than the gross supply-effect estimate.
Key concepts
stock effect : the cumulative effect of the total quantity of bonds purchased under a program on bond prices and spreads, estimated over the full life of the program; in this paper the stock effect is significantly larger than the announcement-day effect, consistent with gradual portfolio rebalancing.
cross-asset supply effect : the pass-through of government bond (gilt) purchase supply shocks to the prices of corporate bonds — an asset class not directly targeted by QE; the paper provides the first estimates of this cross-market supply channel at the security level.
credit spread : the difference between the yield on a corporate bond and the yield on a risk-free government bond of the same maturity; the paper finds QE pass-through is generally limited to the default-free component of corporate yields rather than the credit spread.
default-free component : the part of a corporate bond’s yield attributable to the risk-free interest rate rather than credit risk; the paper finds that QE supply shocks affect this component but generally leave the credit spread unchanged in normal market conditions.
within-asset substitution effect : the price effect of CE purchases on the bonds directly purchased and their corporate bond substitutes, as distinct from cross-asset effects; the paper finds this effect is substantially larger in magnitude than the cross-asset QE effect on corporate bonds.
issuance channel : the mechanism by which lower corporate borrowing costs induced by CE stimulate new corporate bond issuance; the paper finds this channel operates under CE (CBPS) but not under QE (gilt purchases).