The Bank of England published Staff Working Paper No. 1,108 examining how preferred-habitat demand affects the transmission of quantitative easing (QE) and quantitative tightening (QT) through gilt markets. Using granular Bank of England QE and QT auction data alongside bond-level secondary market transaction data, the authors find that preferred-habitat investors such as pension funds and insurance companies were associated with less elastic bidding in QE auctions, while no significant preferred-habitat demand pressures are detected in QT auctions. To explain the asymmetry between QE and QT, the paper extends the constant-elasticity preferred-habitat demand model of Vayanos and Vila (2021) by allowing demand elasticity to depend on the amount of bond supply available to investors. The reduced role of the preferred-habitat channel during QT is presented as consistent with increased UK government bond issuance after the Covid-19 pandemic. The analysis is published as research in progress to elicit comments and debate and does not represent Bank of England policy.
Bank of England 2025-01-10
Bank of England staff working paper finds preferred-habitat demand influenced QE auction bidding but not QT sales
The Bank of England's Staff Working Paper No. 1,108 examines how preferred-habitat demand affects QE and QT transmission in gilt markets. It finds that preferred-habitat investors, like pension funds and insurance companies, exhibit less elastic bidding in QE auctions, with no significant demand pressures in QT auctions. The paper extends the Vayanos and Vila model to explain this asymmetry, noting the reduced role of the preferred-habitat channel during QT aligns with increased UK government bond issuance post-Covid-19.