The policy of Quantitative Easing (QE) led institutional investors to shift their portfolios away from government gilts towards corporate bonds, suggests a new working paper (http://www.bankofengland.co.uk/research/Pages/workingpapers/2014/wp510.aspx) published by the Bank of England.

The paper examines how QE affected the investment behaviour of insurance companies and pension funds and whether their behaviour was consistent with the operation of the so-called 'portfolio balance channel' that has been emphasised by UK and US monetary policy makers as a key channel through which QE works.

Analysis of a range of data sources, including national accounts net investment data and micro-data on life insurance companies and pension funds, suggested QE led to institutional investors shifting their portfolios away from gilts towards corporate bonds. Although analysis of the micro-data does suggest some heterogeneity in the response to QE across different institutions, the shift into corporate bonds was quite widespread.

Portfolio rebalancing by institutional investors into riskier assets seems to have been limited to corporate bonds and did not extend to equities.

Co-author 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.”