Intraday Pricing and Liquidity of Italian and German Treasury Auctions

Abstract

This paper examines how the bond supply, via primary auctions of the Treasury, influences price and liquidity in the secondary market at the day of the auction. Using intraday data from the Mercato Telematico dei titoli di Stato (MTS), I find evidence of an intraday pronounced inverted V-Shape on the yield difference, which goes up with a maximum at the auction time, and then recovers more than two hours after. This "auction effect" is significant for the Italian bonds and for the 10Y German Bund. The analysis of intraday quotes shows that there is also a peculiar liquidity effect due to the bond supply event. Using as a proxy the presence of the dealers in the market, there is evidence of risk-aversion behaviour due to capital constraints and information uncertainty. The sovereign bond crisis exacerbates the dry-up of liquidity for Italy and the price pressure for Germany. However, the ECB intervention through the Public Sector Purchase Program (PSPP) appears to restore the market makers confidence, especially for Italy.

Keywords: Treasury Auctions, Sovereign Bonds, Ecb Intervention, High- Frequency Data

JEL Classification: G01, G12, G14