Price Pressure During Central Bank Asset Purchases: Evidence From Covered Bonds

Abstract

This study examines the impact of the European Central Bank's (ECB) third covered bond purchase program (CBPP3) during 2013–2017 on covered bond yields, issuance, and investor behavior. Only banks can access the ECB standing facilities by pledging covered bonds as collateral. This induces market segmentation in countries with sovereign convenience yields, where banks demand covered bonds (similar safety, lower liquidity) rather than sovereign bonds to earn the yield spread. ECB purchase volumes of 1% of the market are associated with changes in yields by -1.28 bps and in issuance by +2.29 bonds, relative to a closely matched control group. Furthermore, a +1 SD increase in the yield spread is associated with additional magnitudes of -0.82 bps and +1.03 bonds. Dynamic estimates, the cross-section of abnormal issuance, investor shares and portfolio dynamics support the hypothesis.

Keywords: Price Pressure, Bond Issuance, ECB, Covered Bonds, Sovereign Bonds, Convenience Yields, Market Segmentation

JEL Classification: E58, G12, G14, G21