Central bank asset purchases: Insights from quantitative easing auctions of government bonds

How willing are individual primary dealers to alter their offered yields in central bank quantitative easing auctions of government bonds in order to sell an additional share of the outstanding amount of a bond to the central bank? This question is of great importance for a central bank's potential to affect yields during quantitative easing purchase operations and the one I address in this paper. In order to do so I study a unique, and confidential, dataset consisting of all pairs of offered yields and quantities from individual dealers participating in the Riksbank's (central bank of Sweden) quantitative easing auctions from 2015 to 2021. I find, on average, that an offer by individual dealers to sell an additional one percent of the outstanding amount of a bond is associated with between 0.6 to 7.5 basis points lower yields. However, offers depend in a non-linear way on offered amounts. Offers are less elastic (steeper) for offered quantities below 10 per cent and above 20 per cent of outstanding amounts of bonds. The finding of a non-linear slope is new in the literature and is only possible to uncover with access to the whole distribution and significant size of the offered amounts at each auction. Moreover, I find that marginal yields (yields where supply equals demand) at the auctions are highly, and persistently, correlated with changes in market yields for an extended period after the auction suggesting that purchase operations have a more persistent impact on market yields than what has previously been found.