The recent policy of Quantitative Easing (QE) led institutional investors to shift their portfolios away from government gilts towards corporate bonds, suggests a new working paper published by the Bank of England which provides hard evidence on the main channel through which QE is thought to operate in an economy.

Ian Tonks, Professor of Finance at the University of Bath’s School of Management, was seconded to work with economists at the Bank during 2012-2013 to examine how its unconventional monetary policies functioned.

To date, most research on the effects of QE has been inferred from the movement in asset prices, rather than the behaviour of investors such as insurance companies and pension funds, who were the target of the Bank’s policy.

This new research analyses the changing portfolio allocations of institutional investors across a range of broad asset categories using a wide variety of data sources, including aggregate national accounts, and micro-data on individual life insurance companies and pensions funds.

The results imply that QE led insurance companies and pension funds to shift their portfolios away from government gilts towards corporate bonds, relative to the counterfactual of how they would have behaved in the absence of QE.

QE was introduced by the Bank of England in March 2009, following the global financial crisis, and was a programme of large-scale purchases of financial assets from commercial banks and other private institutions, unprecedented in the UK. Between March 2009 and November 2012 the cumulative total amount of gilts bought by the Bank was £375 billion (an amount equivalent to around 25% of annual GDP).

Professor Ian Tonks said: “Overall the balance of the evidence is consistent with the hypothesis that the Bank of England’s QE policy resulted in some portfolio rebalancing by institutional investors, who appear to have reduced their gilt holdings and reinvested some of the proceeds into corporate bonds.

“The results of this research are important for informing other policy makers such as the European Central Bank who have recently announced that they intend to start purchasing asset-backed securities and euro-denominated covered bonds later in the year.”

Working Paper No. 510, Institutional investor portfolio allocation, quantitative easing and the global financial crisis, Michael A.S. Joyce, Zhuoshi Liu and Ian Tonks can be viewed online.

The views expressed in the working paper are those of the authors, and not necessarily those of the Bank of England. Working papers describe research in progress by the authors and are published to elicit comments and to further debate. Any views expressed are solely those of the authors and so cannot be taken to represent those of the Bank of England or to state Bank of England policy.

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