From VoxEU:
Giovanna Bua, Peter Dunne 10 August 2017
By the end of April 2017, the Eurosystem's balance sheet
contained €1.8 trillion of assets, mainly as a consequence of asset
purchase programmes. This column analyses the portfolio rebalancing
effects of the ECB’s programme. The original holders of the assets
eligible for purchase by the ECB mainly purchased bonds of
deposit-taking corporations outside the Eurozone. Investment funds and
their investors did not rebalance significantly toward Eurozone equities
or corporate bonds. While exchange rate and cost of capital effects are
positive outcomes from the programme, local rebalancing effects appear
to be non-existent.
The Eurosystem's Extended Asset Purchase Programme was announced on
22 January 2015. The main component has been acquisitions of government
bonds under the Public Sector Asset Purchase Programme (PSPP) (see
Figure 1). In March 2016, the size of the programme was scaled up from
€60 billion to €80 billion per month. By the end of April 2017, the
Eurosystem's balance sheet contained €1.8 trillion of assets, mainly as a
consequence of asset purchase programmes.
Figure 1 Eurosystem holdings by components of the Expanded Asset Purchase Programme
Notes: ABSPP: Asset Backed Securities Purchase
Programme; CBPP3: Third Covered Bond Purchase Programme; CSPP: Corporate
Sector Purchase Programme; PSPP: Public Sector Purchase Programme; APP:
Total.
In a new paper, we analyse the portfolio rebalancing effects of the
programme (Bua and Dunne 2017). There are several channels through which
asset purchases are understood to transmit to economic effects
(Krishnamurthy and Vissing-Jorgensen 2011). The most direct effect is
simply a rise in the price of assets targeted for purchase. Holders
require higher prices to encourage them to divest an asset that they
usually prefer to hold (or that they are mandated to hold). Planned
purchases of bonds with long terms to maturity also reduce required risk
premiums, and lower expectations of future short-term interest rates.
Expectations of ‘lower-for-longer’ interest rates (and reduced term
premiums) have similar price impacts on non-PSPP assets, because they
reduce discounting of future earnings. This reduces the cost of debt and
equity capital and, if expected earnings growth remains stable, this
should eventually stimulate growth through new issuance.1
Portfolio rebalancing (the redirection of funds usually invested in
PSPP assets into other assets) may further increase price pressure on
non-PSPP assets – even more than that directly caused by a lower
discount rate. Investment displaced by ECB purchases may, however, flow
into cash holdings or to corporate bonds and equities abroad, instead of
at home. As such, there may be less dramatic price effects in Eurozone
bond and equity markets from the purchases. Cash holdings will also
generally lead to limited additional economic effects if there is
already plenty of liquidity in the banking system. In the case of
foreign asset substitution there will possibly be a rise in the values
of foreign currencies (a weakening of the euro), boosting
competitiveness and external demand.
Data and resultsWe use the rebalancing data of actively managed investment funds
domiciled and reporting in Ireland (particularly those that hold PSPP
assets), covering Q1 2014 to Q3 2016. The total asset value of the
entire sector in Q3 2016 was about €2 trillion. Our dataset includes all
investment funds categorised as equity, bond, mixed, hedge, real
estate, money market, and others. Irish investment funds focused on PSPP
assets are roughly 20%, and a representative fraction, of European
funds in this category.2 We focus on asset type, region of
issuance, and original maturity in the portfolio composition. Compared
to previous studies, our dataset allows us to examine both end-quarter
stock positions and within-quarter flows (transactions as percentage of
total assets) for each asset class....MUCH MORE
