Bid-to-Cover and Yield Changes Around Public Debt Auctions in the Euro Area

Abstract

Earlier research has shown that euro-area primary public debt markets affect secondary markets. We find that more successful auctions of euro area public debt, as captured by higher bid-to-cover ratios, lead to lower secondary-market yields following the auctions. This effect is stronger when market volatility is higher. We rationalize both findings using a simple theoretical model of primary dealer behavior, in which the primary dealers receive a signal about the value of the asset auctioned.

Keywords: bid-to-cover ratios, primary and secondary markets, primary dealers, public debt auctions, volatility

JEL Classification: G11, G12, G14, G18