After the Great Financial Crisis of 2008-09, central banks in several advanced economies, including the ECB, made large-scale asset purchases in order to reduce long-term interest rates and stimulate the economy. Following the euro area sovereign debt crisis of 2010-11, financial stability measures were introduced in Europe in order to help preserve financial stability. In this paper, we ask how effective these unconventional monetary policy and financial stability measures have been in reducing the term premia, which also reflect credit risk and liquidity risk, of long-term government bonds in different euro area countries.
One contribution of our paper is to study the announcement effects of the ECB's asset purchase programmes since 2009 on government bond term premia for a wide range of euro area countries, using novel term premia estimates from term structure models by the National Institute of Economic and Social Research at the daily frequency. Another contribution of our paper is to study the effects of the announcements of important financial stability measures in the euro area on government bond term premia in 11 euro area countries.
We find that the term premia of Belgium, Ireland, Italy and Spain fell significantly in response to the announcements of the ECB's asset purchases and of financial stability measures in the euro area, by between 6 and 49 basis points on average per announcement. By contrast, the term premia of Germany increased in response to the announcements of asset purchases and financial stability measures, by around 5 basis points on average per announcement. This increase in the term premia of German government bonds could be due partly to some reversal of a flight to quality into German government bonds following the announcements.
We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area on ten-year government bond term premia in eleven euro area countries in the wake of the global financial crisis and the euro area sovereign debt crisis. We find that the term premia of euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcements of asset purchases and financial stability measures. Term premia of countries with the lowest sovereign risk either increased as in Germany, or were not significantly affected or fell slightly, as in the Netherlands and Finland.
JEL classification: E58, G15
Keywords: monetary policy, asset purchases, financial stability, term premia
Read the full paper at: https://www.bis.org/publ/work721.htm