Preferred habitat behaviour in the gilt market

Julia Giese, Michael Joyce, Jack Meaning and Jack Worlidge

Every financial market transaction has two parties, each with their own preferences. One channel through which quantitative easing works rests on these differences: preferred habitat investors value certain assets above others for non-pecuniary reasons, beyond risk and return. Central bank asset purchases of the preferred asset create scarcity, which may lead to compensating price adjustment, with spillovers to other assets and the macroeconomy. There is, however, little hard evidence on these investors. In a staff working paper, we use a new granular data set on gilt market holdings and transactions to identify groups of investors with preferred portfolio duration habitats. We present a case study suggesting that the Bank’s purchases appear to have come disproportionately from one group of these investors with a relatively strong preference for specific gilt maturities.

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How does the gilt curve react to demand shocks?

By Julia Giese and Lucas Fuhrer


The yield curve is an important barometer of market sentiment and reflects interest rate expectations as well as different risk premia. In this post, we show how changes in demand for UK government bonds, also called gilts, may affect the shape of the yield curve. We find that demand shocks have persistent local effects on the yield curve, in particular at longer maturities and during volatile market conditions. These findings therefore indicate that investors in longer-term gilts tend to be less price-sensitive. Moreover, we find that demand shocks for one bond transmit to neighbouring bonds, while the transmission to other bonds declines with the difference in the residual maturity.

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