Quantitative Easing and Sovereign Bond Yields: A Global Perspective

Abstract

We document the existence of a global monetary policy factor in sovereign bond yields in a panel of 45 countries, consisting of both developed and emerging economies. This global factor is related to the size of the aggregate balance sheet of the four major central banks (Fed, ECB, Bank of Japan and Bank of England). Our estimates suggest that large-scale asset purchases and liquidity provision of major central banks following the Global Financial Crisis have contributed to a significant and permanent decline in long-term yields globally, ranging from 250 basis points for AAA rated sovereigns to 330 basis points for B rated sovereigns. Fiscally weaker Eurozone countries benefited most from Quantitative Easing, with their sovereign yields declining by 600-750 basis points, depending on the rating of their sovereigns. Our findings have important policy implications: normalizing monetary policy by scaling down the expanded balance sheets of major central banks to pre-crisis levels may lead to sharp increases in sovereign bond yields globally with severe consequences for financial stability, vulnerable sovereigns and the global economy.

Keywords: monetary policy; quantitative easing; sovereign bonds; interest rates; panel cointegration

JEL Classification: E42; E43; G12; G15