A Bank of England staff working paper finds that UK and U.S. life insurers respond in opposite directions to monetary tightening, reducing the overall effect on demand for UK corporate bonds. Using security level regulatory transaction data from 2018 to 2022, the research shows that higher UK or U.S. rates increase UK insurers’ purchases of sterling denominated bonds but reduce U.S. insurers’ purchases of dollar denominated bonds issued by UK firms. The authors conclude that analyses of monetary transmission through insurers should account for cross border investor behavior. A 1 percentage point increase in the 10-year gilt yield raises UK insurers’ net purchases of sterling denominated bonds by about 0.5 percentage points of outstanding amounts after two months and 2.5 percentage points after 14 months. It reduces U.S. insurers’ net purchases of dollar denominated bonds by about 1 percentage point after one year. The UK response is concentrated in longer maturity bonds and reflects capital and duration management incentives under Solvency II, while the U.S. response is concentrated in shorter and medium maturities and financial sector bonds. Similar asymmetries follow U.S. monetary tightening, with a 1 percentage point increase in the 10-year U.S. Treasury yield raising UK insurer purchases by about 1.2 percentage points and reducing U.S. insurer purchases by about 0.5 percentage points after one year.
Bank of England working paper finds foreign insurer sales offset domestic UK corporate bond demand after monetary tightening
A Bank of England staff working paper finds that monetary tightening increases UK life insurers’ demand for sterling denominated UK corporate bonds but reduces U.S. insurers’ demand for dollar denominated issues. These offsetting responses suggest foreign insurer activity can weaken monetary transmission through domestic insurer balance sheets.