Investor Behaviour and Reaching for Yield: Evidence from the Sterling Corporate Bond Market

33 Pages Posted: 20 May 2020

Date Written: December 2019

Abstract

We provide evidence on how corporate bond investors react to a change in yields, and how this behaviour differs in times of market‐wide stress. We also investigate ‘reaching for yield’ across investor types, as well as providing insights into the structure of the corporate bond market. Using proprietary sterling corporate bond transaction data, we show that insurance companies, hedge funds and asset managers are typically net buyers when corporate bond yields rise. Dealer banks clear the market by being net sellers. However, we find evidence for this behaviour reversing in times of stress for some investors. During the 2013 ‘taper tantrum’, asset managers were net sellers of corporate bonds in response to a sharp rise in yields, potentially amplifying price changes. At the same time, dealer banks were net buyers. Finally, we provide evidence that insurers, hedge funds and asset managers tilt their portfolios towards higher risk bonds, consistent with ‘reaching for yield’ behaviour.

Keywords: banks, corporate bonds, cyclicality, financial stability, insurers, investment decisions, non‐bank financial institutions, trading volume

JEL Classification: G11, G12, G15, G21, G22, G23

Suggested Citation

Czech, Robert and Roberts‐Sklar, Matt, Investor Behaviour and Reaching for Yield: Evidence from the Sterling Corporate Bond Market (December 2019). Financial Markets, Institutions & Instruments, Vol. 28, Issue 5, pp. 347-379, 2019, Available at SSRN: https://ssrn.com/abstract=3601173 or http://dx.doi.org/10.1111/fmii.12122

Robert Czech (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/researchers/robert-czech

Matt Roberts‐Sklar

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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