The effects of quantitative easing on the cost of issuing UK government debt, on the bid-to-cover ratio at the debt auctions and on the integration of UK capital markets

Abstract

This thesis examines the impacts of Quantitative Easing (QE) on the UK gilt market, focusing on government debt issuance costs, market demand, and financial market volatility. Despite a willing buyer of gilts during QE phases, issuance costs were higher, driven by volatility and supply increases during economic turbulence. Costs were particularly sensitive for longer maturity bonds and bonds already held by the Bank of England, indicating diminishing effects of QE over time. Auction demand, measured by the bid-to-cover ratio, rose significantly during QE phases but fell during periods of financial instability, larger auction sizes, and longer maturities. Liquidity-enhancing mechanisms, such as the Post Auction Option Facility (PAOF), positively influenced demand, while QE improved short-term demand but posed long-term liquidity challenges. Volatility analysis shows that during QE phases, short-term gilts experienced lower volatility, while long-term gilts showed higher volatility. However, greater intensity of purchases by the Bank of England reduced overall bond market volatility but increased volatility in the equity market. During QT phases, higher volatility was observed across all markets, though QT-active phases mitigated this effect, leading to relatively lower volatility. This thesis provides a comprehensive understanding of how QE and QT influence sovereign debt management and financial market stability. The findings offer practical insights for policymakers and market participants navigating the complexities of unconventional monetary policy.