Cross‐Border Auction Cycle Effects of Sovereign Bond Issuance in the Euro Area

Abstract

We provide evidence for the euro area of spillovers from foreign public debt auctions into domestic secondary‐market auction cycles. We also confirm existing evidence of such spillovers from domestic issues into the domestic secondary market. Consistent with a theory of primary dealers’ limited risk‐bearing capacity, we find that auction cycles from domestic issues are stronger during the recent crisis period, whereas cross‐border effects are stronger in the precrisis period, but this evidence is not strong. This finding likely reflects the opposing effects of reduced sovereign bond market integration during the crisis and higher yield covariances caused by more market volatility.

Dealing with Dealers: Sovereign CDS Comovements

“…The results obtained by Lou, Yan, and Zhang (2013) and Beetsma, Giuliodori, de Jong, and Hanson (2016) for sovereign bonds are also consistent with the theory of primary dealers' limited risk-bearing capacity.…”

Unconventional Monetary Policy and Auction Cycles of Eurozone Sovereign Debt

“…Comparing the results with those for the full sample period, Table 6 suggests that domestic auction cycles have in general become stronger and more responsive to market volatility for low-rated countries. Potential, and non-exclusive, explanations are the increase in the size of the auctions of these countries since the start of the debt crisis (see Table 2) and the shrinkage of trading capital of major primary dealers (see Beetsma et al, 2018), which may have contributed to increased market risk aversion. Table 7: Cluster-Specific Effects for the APP period.…”

“…event studies are conducted byLou et al (2013), who provide evidence for the United States of an inverse V-shaped pattern of secondary market yields around auction dates, andBeetsma et al (2016Beetsma et al ( , 2018, who present similar evidence for Eurozone countries.…”

“…Sigaux (2018) confirms the price fall of the debt during the run-up to Italian treasury auctions. Beetsma et al (2018) extend Beetsma et al (2016) by developing a theoretical model that allows for auction cycle effects of foreign debt issuance. For both they find substantial evidence.…”

“…Also, the statistics presented below refer to (auctions of) 10-year debt.The sample starts on January 1 st , 1999, and ends on December 29 th , 2017. The dataset extends that used byBeetsma et al (2018) into the country-and time-dimension. The increased sample allows us to test our hypotheses for sub-groups of countries and for sub-periods.…”