Economic Letter
Brief summaries of SF Fed economic research that explain in reader-friendly terms what our work means for the people we serve.
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Central Bank Bond Purchases and the Price of Safety
Jens H. E. Christensen, Nikola Mirkov, Xin Zhang
Central banks purchase bonds and other securities with their own reserves. In doing so, they expand the supply of safe assets in the economy, which should lower the premium investors are willing to pay for safety. Analysis confirms that bond purchases by the European Central Bank in 2015–2021 lowered safety premiums for investors, partially offsetting declines in bond yields as much as 30 basis points. The results suggest that such transactions essentially reduce a central bank’s effectiveness in using asset purchases to lower interest rates in safe bond markets.
