Can EU bonds serve as euro-denominated safe assets?

Tilman Bletzinger, William Greif and Bernd Schwaab

No 2712, Working Paper Series from European Central Bank

Abstract: A safe asset is of high credit quality, retains its value in bad 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, also reducing liquidity risk premia. Eurosystem purchases and holdings of EU bonds did not impair market liquidity. Currently, one 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. JEL Classification: E58, G12, H63

Keywords: EU-issued bonds; European Central Bank; European Union; market liquidity; NextGenerationEU (NGEU); Pandemic Emergency Purchase Programme (PEPP) (search for similar items in EconPapers)
Date: 2022-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-fmk and nep-rmg
Note: 2652553
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Citations: View citations in EconPapers (5)

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Journal Article: Can EU Bonds Serve as Euro-Denominated Safe Assets? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222712

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