Abstract

THE EFFECT OF EUROSYSTEM ASSET PURCHASE PROGRAMMES ON EURO AREA SOVEREIGN BOND YIELDS DURING THE COVID-19 PANDEMIC


George Hondroyiannis
Bank of Greece and Harokopio University

Dimitrios Papaoikonomou
Bank of Greece

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 to 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.


JEL classification: C33, E44, E52, E58, F34, G15
Keywords: Euro area, asset purchase programmes, sovereign bond yields, time-varying parameters.

Acknowledgements: We would like to thank Maria Gkioka for excellent research assistance and participants at an internal presentation at the Bank of Greece for very helpful comments. We are most grateful to Hiona Balfoussia and Dimitrios Louzis for very helpful comments and suggestions. All remaining errors are our own. The views expressed are those of the authors and should not be interpreted as those of their respective institutions.

Correspondence:
George Hondroyiannis
Fiscal Affairs Division
Economic Analysis and Research Department
Bank of Greece
21, E. Venizelos Avenue
Athens 102 50, Greece
Tel. +30 210 3202429
email: ghondroyiannis@bankofgreece.gr


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