The effect of Eurosystem asset purchase programmes on euro area sovereign bond yields during the COVID-19 pandemic

Abstract

We investigate the effect of Eurosystem asset purchase programmes (APP) on the monthly yields of 10-year sovereign bonds for 11 euro area sovereigns during January–December 2020. The analysis is based on time-varying coefficient methods applied to monthly panel data covering the period 2004m09–2020m12. During 2020, APP contributed to an average decline in yields estimated in the range of 58–76 bps. In December 2020, the effect per EUR trillion ranged between 34 bps in Germany and 159 bps in Greece. Stronger effects generally display diminishing returns. Our findings suggest that a sharp decline in the size of the APP in the aftermath of the COVID-19 crisis could lead to very sharp increases in bond yields, particularly in peripheral countries. The analysis additionally reveals a differential response to global risks between core and peripheral countries, with the former enjoying safe-haven benefits. Markets’ perceptions of risk are found to be significantly affected by credit ratings, which is in line with recent evidence based on constant parameter methods.

COVID-19, Economic Policies and Public Debt Sustainability in Italy

“…This PEPP is practically equivalent to a "temporary monetization" of the public debt increases consequent to the pandemic, thus-besides supporting economic growth (Some specific effects of PEPP on economic growth-more precisely through the transmission channel and on banking sector credit risk, financial distress, banking sector profitability, and solvency-have been investigated by Teresiené et al [51]). It also favors sovereign debt sustainability and the persistence of extremely low interest rates (also in peripheral Eurozone countries); some studies have econometrically verified the impact of the Asset Purchases Program (APP), including PEPP, on the reduction of sovereign yields of euro area countries [52]; the decline in yields has been estimated in the range of 58-76 bps. ; the analysis is based on time-varying coefficient methods applied to monthly panel data.).…”