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Central Bank Interventions, Demand for Collateral, and Sovereign Borrowing Costs

Luís Fonseca, Miguel Faria-e-Castro and Matteo Crosignani ()

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We analyze the effect of unconventional monetary policy, in the form of collateralized lending to banks, on sovereign borrowing costs. Using our unique dataset on monthly security- and bank-level holdings of government bonds, we document that Portuguese banks increased their holdings of domestic public debt during the allotment of the three year Long-Term Refinancing Operations (LTRO) of the European Central Bank. We argue that domestic banks engaged in a "collateral trade", which involved the purchase of high-yield bonds with short maturities that could be pledged as collateral for low cost and long-term borrowing from the ECB. This significant increase in bond holdings was concentrated in shorter maturities, as these were especially suited to mitigate funding liquidity risk. The resulting steepening of the sovereign yield curve and the timing and characteristics of government bond auctions are consistent with a strategic response by the debt management agency.

JEL-codes: E44 E52 E63 G21 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ger, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201509

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