Impact of Asset Purchases on the Bond Market
Working Paper, 2023. Central-bank asset-purchase programmes can matter even in deep bond markets when investor demand is inelastic. Using eMaxx holdings for 16,000 fixed-income funds matched with Refinitiv pricing and rating data over 2016–2020, I estimate a nested-logit demand system to quantify how the ECB’s Asset Purchase Programmes (APP) propagate across the euro-area bond market. I document two key mechanisms. First, front-loading: when the ECB expands purchases, some funds accumulate targeted ISINs, reducing free float and extracting a liquidity premium. Second, portfolio rebalancing: as purchase-eligible spreads compress, funds with more flexible mandates shift into higher-yield, untargeted bonds, pushing their prices up. Estimated price elasticities are low, implying sizeable price multipliers. Markets are imperfectly segmented: sovereign bond purchases spill over to corporate prices. A counterfactual removing all ECB holdings would lower average corporate-bond prices by about 25% and widen spreads by 280 basis points; removing only corporate holdings still lowers prices by nearly 20%. Substitution is asymmetric: funds substitute out of sovereigns far more easily than they substitute into corporates, consistent with mandate rigidities. Overall, the results show that limits to arbitrage amplify the effects of quantitative easing, and that a relatively small group of large funds plays a central role in transmitting ECB purchases to non-targeted markets.