Can EU Bonds Serve as Euro-Denominated Safe Assets?

Tilman Bletzinger, William Greif and Bernd Schwaab
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William Greif: European Central Bank, D-60066 Frankfurt am Main, Germany

JRFM, 2022, vol. 15, issue 11, 1-13

Abstract: A safe asset is of high credit quality, retains its value in difficult times, and is traded in liquid markets. We show that bonds issued by the European Union (EU) are widely considered to be of high credit quality, and that their yield spread over German Bunds remained contained during the 2020 COVID-19 pandemic recession. Recent issuances and taps under the EU’s SURE and NGEU initiatives helped improve EU bonds’ market liquidity from previously low levels, while also reducing liquidity risk premia. Eurosystem purchases and holdings of EU bonds did not impair market liquidity. Currently, an obstacle to EU bonds achieving a genuine euro-denominated safe asset status, approaching that of Bunds, lies in the one-off, time-limited nature of the EU’s COVID-19-related policy responses.

Keywords: European Central Bank; European Union; EU-issued bonds; NextGenerationEU (NGEU); market liquidity; Pandemic Emergency Purchase Programme (PEPP) (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Can EU bonds serve as euro-denominated safe assets? (2022)
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