So it should not come as a surprise to see continued outflows from low-yielding euro area bond markets. But not all investors are willing or able to assume large amounts of foreign exchange risk on their balance sheets, particularly when the direction of exchange rate movements might be less predictable than during the run-up to the launch of a major monetary policy measure, such as asset purchases. Returns on US Treasuries adjusted for foreign exchange risk, however, have fallen steadily as the government bond yield curve in the United States has flattened. You can see this on the righthand side. Since about mid-2017 the yield of a hedged ten-year US Treasury has been below that of its German equivalent. There are two factors, in my view, that might help explain the observed persistence of capital 4/7  BIS central bankers' speeches  flows. The first has to do with the “traditional” stock effect of asset purchases.5 Central bank asset purchase programmes effectively constrain the supply of bonds available to private price-sensitive investors. So, the share of outstanding central government bonds held by the private sector – the so-called “free float” – has declined measurably as a result of our cumulative purchases, also when taking into account the considerable amount of buy-and-hold investors. The implication is that some euro area fixed income securities are increasingly hard to come by, or come with a price tag unattractive for more short-term orientated investors. This may incentivise some market participants to roll over their international asset allocations instead.
1/7  BIS central bankers' speeches  There was a striking turnaround in capital flows, from net inflows to net outflows, that started in mid-2014, just when we had announced our credit easing package and when expectations were gradually building among market participants that we would also begin purchasing government bonds. At their peak in the spring of 2016, net capital outflows – measured here in terms of 12-month moving sums – reached nearly 5% of euro area GDP. Never before in the history of the euro area have capital flows been so high. You can also see that virtually all net capital outflows have been concentrated in purchases of foreign long-term debt securities. That is, large-scale purchases of sovereign bonds by the ECB encouraged many investors to rebalance their portfolios towards the closest substitute – bonds issued by other sovereigns.3 These capital outflows are likely to have added to downward pressure on global bond yields.4 For quantitative evidence, see Cœuré, B. (2017), “Monetary policy, exchange rates and capital flows”, speech at the 18 Jacques Polak Annual Research Conference hosted by the International Monetary Fund, Washington, 3 November. On the right-hand side you can see that the start of the APP, and prior expectations thereof, coincided with a measurable decline not only in euro area overnight index swap term premia but also in term premia in the United States. Put simply, increased demand for foreign securities increased their prices and thereby lowered their yield.