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Can EU Bonds Serve as Euro-Denominated Safe Assets?

Author

Listed:
  • Tilman Bletzinger

    (European Central Bank, D-60066 Frankfurt am Main, Germany)

  • William Greif

    (European Central Bank, D-60066 Frankfurt am Main, Germany)

  • Bernd Schwaab

    (European Central Bank, D-60066 Frankfurt am Main, Germany)

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.

Suggested Citation

  • Tilman Bletzinger & William Greif & Bernd Schwaab, 2022. "Can EU Bonds Serve as Euro-Denominated Safe Assets?," JRFM, MDPI, vol. 15(11), pages 1-13, November.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:11:p:530-:d:972151
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    References listed on IDEAS

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    Cited by:

    1. Speck, Christian, 2023. "Pricing the Bund term structure with linear regressions – without an observable short rate," Discussion Papers 08/2023, Deutsche Bundesbank.
    2. Justus Inhoffen & Iman van Lelyveld, 2023. "Safe Asset Scarcity and Re-use in the European Repo Market," Working Papers 787, DNB.

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    More about this item

    Keywords

    European Central Bank; European Union; EU-issued bonds; NextGenerationEU (NGEU); market liquidity; Pandemic Emergency Purchase Programme (PEPP);
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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