The Eurosystem’s bond market share at an all-time high: what does it mean for repo markets?

Tomás Carrera de Souza and Thomas Hudepohl ()

Working Papers from DNB

Abstract: In this paper we study the link between central bank asset purchases and the repo market, to examine the impact of the Eurosystem’s increased footprint in financial markets resulting from the response to the Covid-19 crisis. To do so, we exploit different highly granular data on government bond purchases and money market transactions. We find that both marginal purchases (flow effect) and aggregate holdings (stock effect) have a significant downward impact on repo rates. The stock effect is nonlinear, and is amplified when the central bank’s holdings are larger. Finally, we find that the Eurosystem’s Securities Lending Facility alleviates the downward pressure on repo rates for scarce bonds, but it does not fully compensate for the downward pressure created by purchases. This collateral scarcity may hamper a smooth functioning of repo and underlying bond markets.

Keywords: Asset purchases; Unconventional monetary policy; Money Market; Repo Market; Specialness (search for similar items in EconPapers)
JEL-codes: E52 E58 G10 G15 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:745

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