Passive Quantitative Easing: Bond Supply Effects through a Halt to Debt Issuance

Christensen, Jens H. E.; Hetland, Simon Thinggaard

doi:10.24148/wp2023-24

Working Paper

Passive Quantitative Easing: Bond Supply Effects through a Halt to Debt Issuance

Abstract: This article presents empirical evidence of a supply-induced transmission channel to longterm interest rates caused by a halt to government debt issuance. This is conceptually equivalent to a central bank operated asset purchase program, commonly known as quantitative easing (QE). However, as it involves neither asset purchases nor associated creation of central bank reserves, we refer to it as passive QE. For evidence, we analyze the response of Danish government bond risk premia to a temporary halt in government debt issuance announced by the Danish National Bank. The data suggest that declines in longterm yields during its enforcement reflected both reduced term premia, consistent with supply-induced portfolio balance effects, and increased safety premia, consistent with safe assets scarcity effects.

Keywords: affine arbitrage-free term structure model; negative interest rates;

JEL Classification: E43; E47; G12; G13;

https://doi.org/10.24148/wp2023-24