Quantitative Easing and Preferred Habitat Investors in the Euro Area Bond Market

Abstract

Quantitative easing (QE) aims to lower long term interest rates and stimulate economic growth via the portfolio rebalancing channel. One of the assumptions for QE to work is that there are investors with strong preferences to hold long term bonds, i.e. so called preferred habitat investors. This paper investigates whether the ECB’s Public Sector Purchase Programme (PSPP) affected euro area investors’ demand for bonds using granular securities holdings data. The results show strong evidence that euro area investors acted as preferred habitat investors. These findings hold across all major euro area investors (banks, insurance companies, pension funds and investment funds). The results suggest that since the sellers of bonds in response to QE in the euro area are different from those that sold to the Fed, BoE and BoJ, policymakers need to pay particular attention to demand by non-euro area investors, especially if the ECB plans to reduce its balance sheet.

Keywords: quantitative easing, sovereign bonds, European Central Bank, PSPP, securities holdings statistics

JEL Classification: E58, F42, G11, G15