Watering the Garden of Government Securities: Measuring the 'Bunching' Effect in Euro Sovereign Bond Markets
Government of the Italian Republic (Italy) - Ministry of Economy and Finance - Department of the Treasury Working Papers Collection
22 Pages Posted: 12 Jun 2009
Date Written: June 5, 2008
The adoption of a common currency raised the degree of substitution between financial instruments supplied by EU Member States to finance their national debts. In this framework, our paper looks at a particular determinant of liquidity-related spreads in euro-area government bonds. Simultaneous issuance of similar bonds floods the market with paper and could lead to higher funding costs for sovereign borrowers. We test the significance of this problem, over-supplying liquidity due to a bunching of contemporaneous issues, in a government bond market where borrowers do not coordinate their issuance plans. We find that there is a significant relationship between bunching in issues and higher yield spreads. Moreover, in line with the existing literature, we find a negative correlation between liquidity and bond yields.
Keywords: EMU, Government Bond Yields, Liquidity, Calendar of Issuance
JEL Classification: H63, H69
Suggested Citation: Suggested Citation