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debt, Europe

Sovereign debt reaction to the announcement of non-conventional monetary policies

Sovereign debt reaction to the announcement of non-conventional monetary policies 

Prepared by Stefano Fugazzi


ABC Economics founder and associate member of NUJ

March 2016

 The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of ABC Economics. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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This paper assesses the sovereign debt market’s reaction to the ECB announcement of non-conventional monetary policies. Our findings are consistent with previous studies in the literature which generally conclude that sovereign bond yields decrease subsequent to announcement of monetary easing initiatives.

Observed events

  • 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: Asset Purchase Programme (APP)
  • 10 March 2016: expansion of Asset Purchase Programme (APP)

The Covered Bond Purchase Programme (CBPP) was a programme announced on 7 May 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 billion euro of covered bonds. On 6 October  2011 the ECB announced it would reactivate the programme (CBPP2) and that it was intended to amount to 40 billion euro between November 2011 and October 2012. On 3 November 2011 the ECB announced further details about maturities, eligibility and counterparties.

The Securities Markets Programme (SMP) program was initiated in May 2010 as part of the euro-system’s single monetary policy. It was intended as a temporary program to address malfunctioning in the securities markets and to allow the normal functioning of the monetary policy transmission mechanism. The interventions were sterilised as equivalent liquidity was withdrawn from the system by the ECB to leave the SMP monetary policy “neutral”. There was no monetisation of eurozone sovereign debt. Liquidity was absorbed by the ECB via the collection of 1-week fixed term deposits.

Long Term Refinancing Operation (LTRO) – The European Central Bank’s long-term refinancing operation was a process by which the ECB provided financing to eurozone banks. The stated aim of the LTRO was 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.

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

Targeted Longer-Term Refinancing Operations (TLTROs) – In pursuing its price stability mandate, the Governing Council of the ECB announced measures to enhance the functioning of the monetary policy transmission mechanism by supporting lending to the real economy. In particular, the Governing Council decided to conduct a series of LTROs 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.

Asset Purchase Programme (APP) – In March 2015 the ECB and national central banks of eurozone member states started buying 60 billion euro of government debt each month. That figure included re-bundled private debt, asset-backed securities and covered bonds, typically worth about 10 billion euro, on top of the roughly 50 billion euro in state bonds. The programme was subsequently enhanced to include a wider range of eligible assets.

Research methods

To derive the variations in yields we selected the 10-year sovereign papers of France and Germany in addition to the so called ‘PIIGS economies’, a derogatory term referring to the economies of Portugal, Ireland, Italy, Greece and Spain.

This research is entirely based on secondary data collected via Bloomberg and TradingEconomics and subsequently reworked by ABC Economics.



summary 2of3



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.

The announcement of SMP, TLTRO and APP operations have led to an overall decrease of yields over the day 0 to day +3 horizon, with two exceptions:

  • Greece – Athens’s 10-year yield increased following the initial exclusion of the Hellenic country from the Asset Purchase Programme;
  • Germany – the Bund reacted negatively to the extended APP operation. The reader should note that yields may have increased as a result of the outcome of the German municipal elections.

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 countries (a decrease in yields).


Fugazzi, S. (2003), Do Strategic Alliances Create Value: The Case of the US Biotechnology Sector; Michael Smurfit Graduate School of Business

Fugazzi, S. (2016), ABC Economipedia; ABC Economics, ISBN 9781326252700 and 9781326244675






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