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Sovereign debt reaction to non-conventional monetary policies

Stefano Fugazzi (ABC Economics) – The purpose of this paper is to assess the sovereign debt market’s reaction to the ECB announcement of non-conventional monetary policies. With that in mind, we selected the following policy announcements:

  • 7 May 2009: Covered Bond Purchase Programme (CBPP)
  • 10 May 2010: Securities Markets Programme (SMP)
  • 6 October 2011: Long Term Refinancing Operation (LTRO)
  • 2 August 2012: Outright Monetary Transactions (OMT)
  • 5 June 2014: Targeted Longer Term Refinancing Operations (TLTRO)
  • 22 January 2015: Quantitative Easing (QE)

To derive the variations in yields we selected the 10-year sovereign papers of France, Germany, Greece, Ireland, Italy, Portugal and Spain.

Main conclusions

In the cases of the announcement of the CBPP and LTRO programmes, within the 0-3 days horizon we noticed a yield increase across the entire sample reaching a +7.73% in the case of Germany’s bunds following the Long Term Refinancing Operation. A similar pattern was also observed within the day -3 to day +3 horizon with highs of +15.47% and 12.50% for France and Germany following the announcement of the LTRO, with the exceptions of Irish, Greek and Portuguese papers whose yields declined by 2-3% in the case of the CBBP.


summary 2of2

The announcement of SMP, TLTRO and QE operations have led to an overall decrease of the yields over the day 0 to day +3 horizon with the sole exception of Greece where the ECB has opted not to include the Hellenic country within the programme.

Mixed reactions for the OMT which was intended as a replacement for the SMP. Negative for France and Germany (an increase in the 10-year yields) and positive for the PIIGS (Portugal, Italy, Greece and Portugal) countries (decrease).








Notes on non-conventional monetary policies

The Covered Bond Purchase Programme (CBPP) was a programme announced on May 7, 2009, on the basis of article 18 of the ECB statute. It has been in operation during two periods. The ECB first intervened between July 2009 and June 2010 (CBPP1), during which time the ECB outright purchased €60 bn of covered bonds. On October 6 2011, the ECB announced it would reactivate the programme (CBPP2) and that it was intended to amount to €40 bns between November 2011 and October 2012. On November 3, 2011, the ECB announced further details about maturities, eligibility and counterparties. (source)

The ECB’s SMP program was initiated in May 2010 as part of the Euro-system’s single monetary policy. It was intended as a temporary program, its role to address malfunctioning in the securities markets and to allow the normal functioning of the monetary policy transmission mechanism. The purpose of the program is to ensure depth and liquidity in markets that are not functioning normally. The aim is not to ease monetary policy outright or to finance public sector borrowing. The interventions are therefore sterilised. Equivalent liquidity is withdrawn from the system by the ECB to leave the SMP monetary policy “neutral”. There is no monetisation of Eurozone sovereign debt. Liquidity is currently absorbed by the ECB via the collection of 1-week fixed term deposits. A variable tender with a maximum bid rate of 1% is currently used. This is done on a rolling weekly basis. (source)

The European Central Bank’s long-term refinancing operation is a process by which the ECB provides financing to eurozone banks. The stated aim of the LTRO is to maintain a cushion of liquidity for banks holding illiquid assets, and thus prevent interbank lending and other loan origination from seizing up as they did in the credit squeeze of 2008. (source)

Outright Monetary Transactions (“OMT“) is a program of the European Central Bank under which the bank makes purchases (“outright transactions”) in secondary, sovereign bond markets, under certain conditions, of bonds issued by Eurozone member-states. (source)

In pursuing its price stability mandate, the Governing Council of the ECB has today announced measures to enhance the functioning of the monetary policy transmission mechanism by supporting lending to the real economy. In particular, the Governing Council has decided to conduct a series of targeted longer-term refinancing operations (TLTROs) aimed at improving bank lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a window of two years. (source)

QE – The European Central Bank is a money printing programme to bolster the flagging euro zone economy. In March  2015, the ECB and national central banks of euro zone member states started buying 60 billion euros of chiefly government debt each month. That figure includes re-bundled private debt, asset-backed securities and covered bonds, typically worth about 10 billion euros, on top of the roughly 50 billion euros in state bonds. The plan is to buy until September 2016 or until there has been a “sustained” improvement in consumer price inflation, which recently turned negative. The programme could end earlier if successful, or be extended if its impact is small.

12 per cent of the buying will be in the secure debt of European institutions – the European Investment Bank as well as bodies set up to help troubled countries in the euro crisis, the European Stability Mechanism and the European Financial Stability Facility. A further 8 per cent of the overall purchases will be government bonds bought directly by the ECB. Any risk here will be shared across the entire euro zone.

The remainder – 80 per cent of the government bonds – will be the responsibility of national central banks. They bear the risk. (source)



2 thoughts on “Sovereign debt reaction to non-conventional monetary policies

  1. Very interesting post. I wish I would have thought of it myself. Thanks for doing this! 🙂
    It would be interesting to do the same type of event analysis with political events/declarations, like the Deauville agreement, the creation of the EFSF, Papademos’ speech in 2012, the fall of the Portuguese government in 2011, etc.

    Posted by fmpdea | March 24, 2015, 12:23 pm

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