Effects of monetary policy announcements on term premia in the euro area during the COVID-19 pandemic

Richhild Moessner,Jakob De Haan

doi:10.1016/j.frl.2021.102055

Richhild Moessner, Jakob De Haan

Open Access

https://doi.org/10.1016/j.frl.2021.102055

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Abstract

We study the effects of the announcement of the ECB's Pandemic Emergency Purchase Programme (PEPP) on ten-year government bond term premia in eleven euro-area countries, while controlling for other ECB statements. We find that the term premia of government bonds in euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcement of the PEPP. This occurred after these term premia had risen in response to a prior monetary policy press conference statement by the ECB president that the ECB was “not here to close spreads”.

Highlights

The COVID-19 pandemic has inflicted economic damage on a previously unprecedented scale
We study the effects of the announcement of the Pandemic Emergency Purchase Programme (PEPP) on ten-year government bond term premia in eleven euro-area countries, and examine whether the magnitude of these effects is related to sovereign risk, while controlling for other ECB statements
There is an extensive literature examining the effects of monetary policy announcements on financial markets

Summary

Introduction

The COVID-19 pandemic has inflicted economic damage on a previously unprecedented scale. In response to the COVID-19 pandemic, the ECB announced the Pandemic Emergency Purchase Programme (PEPP) on 18 March 2020, for purchases of government bonds of euro area countries and private sector securities for a total amount of €750 billion (later increased to €1.35 trillion). We study the effects of the announcement of the PEPP on ten-year government bond term premia in eleven euro-area countries, and examine whether the magnitude of these effects is related to sovereign risk, while controlling for other ECB statements. One dummy variable for asset purchase announcements, related to an expansion of asset purchases, dapo(t), equals one on 10 March 2016, 2 June 2016 and 12 September 2019, and zero otherwise. As a measure of sovereign risk, we use data on 5-year sovereign CDS spreads for individual euro area countries. All results hold when using sovereign CDS spreads for each country directly, rather than as a difference to France (results available on request)

Method and results

Conclusions