- Working Paper Series
Federico Maria Ferrara
Central bank asset purchases
and auction cycles revisited:
new evidence from the euro area
No 2927
Disclaimer: This paper should not be reported as representing the views of the European Central Bank
(ECB).
- Abstract
This study provides new evidence on the relationship between unconventional monetary
policy and auction cycles in the euro area.
- The findings indicate that Eurosystem?s asset purchase flows mitigate
yield cycles during auction periods and counteract the amplification impact of market volatility.
- The dampening effect of central bank asset purchases on auction cycles is more sizeable and
precisely estimated for purchases of securities with medium-term maturities and in jurisdictions
with relatively lower credit ratings.
- On the other hand, central banks may influence price dynamics in these markets, most notably
through their asset purchase programmes.
- If so, do central bank asset purchases
affect bond yield movements around auction dates?
- Auction cycles are present when secondary market yields rise in
anticipation of a debt auction and fall thereafter, generating an inverted V-shaped pattern around auction
dates.
- ECB Working Paper Series No 2927
3
1
Introduction
The impact of central bank asset purchases on government bond markets is a focal point of economic and
financial research.
- If so,
do central bank asset purchases shape yield sensitivity around auction dates?
- The paper provides new evidence on the effects of Eurosystem?s asset purchases on secondary market
yields around public debt auction dates.
- The analysis builds on previous research based on aggregate data
on central bank asset purchases and a shorter analysis period (van Spronsen and Beetsma 2022).
- Using
granular data on Eurosystem?s asset purchases offers an opportunity to shed light on the mechanisms linking
unconventional monetary policy and auction cycles.
- Given this legal constraint, the study
hypothesises that the effect of asset purchases on 10-year auction cycles is mostly indirect, and goes via price
spillovers generated by purchases of securities outside the 10-year maturity space.
- Taken together, these results provide new evidence about auction cycles in Europe and contribute to a
larger literature on the flow effects of central bank asset purchases on bond markets.
- Section 4 offers descriptive evidence about auction cycles in the euro area.
- Auction cycles are defined by the presence of an inverted V-shaped pattern in secondary market yields
around primary auctions.
- That is, government bond yields rise in the run-up to the date of the auction and
fall back to their original level after the auction.
- Their limited risk-bearing capacities and inventory management operations are
seen as key mechanisms driving auction cycles (Beetsma et al.
- ECB Working Paper Series No 2927
7
Second, central bank asset purchases can alleviate the cycle by (partly) absorbing the additional supply
of substitutable instruments in the secondary market (van Spronsen and Beetsma 2022).
- This expectation is
supported by several analyses on the price effects of central bank bond purchases (D?Amico and King 2013;
Arrata and Nguyen 2017; De Santis and Holm-Hadulla 2020).
- Empirically, previous research has provided evidence of auction cycles taking place across different jurisdictions.
- (2016) detect auction cycles for government debt in Italy, but not in Germany, during the European
sovereign debt crisis.
- Research on the impact of central bank asset purchases on yield cycles around auctions is still limited.
- Their paper provides evidence
that Eurosystem?s asset purchases reduce the presence of auction cycles for euro area government debt.
- Nonetheless, several questions remain open about auction cycles and unconventional monetary policy
in the euro area.
- Therefore, they
provide only a partial picture of auction cycles and central bank asset purchases in Europe.
- The use of granular data on central bank asset purchases is especially important in light of the modalities
of monetary policy implementation of the Eurosystem.
- Altogether, these elements motivate further investigation of the relationship between central bank asset
purchases and auction cycles in the euro area.
- Taken together, these results confirm that Eurosystem?s asset purchases mitigate yield cycles during auction periods and counteract the amplification impact of market volatility.
- The findings confirm that the flow
effects of central bank purchases on yield movements around auction dates are driven by lower-rated countries.
- Additional analyses provide evidence for an indirect effect of purchases on auction cycles and highlight
the presence of substantial heterogeneity across jurisdictions and purchase programmes.
- Flow Effects of Central Bank Asset Purchases on Sovereign Bond
Prices: Evidence from a Natural Experiment.
- Federico Maria Ferrara
European Central Bank, Frankfurt am Main, Germany; email: [email protected]
? European Central Bank, 2024
Postal address 60640 Frankfurt am Main, Germany
Telephone
+49 69 1344 0
Website
www.ecb.europa.eu
All rights reserved.
