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

Author

Listed:
  • Tomás Carrera de Souza
  • Tom Hudepohl

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.

Suggested Citation

  • Tomás Carrera de Souza & Tom Hudepohl, 2022. "The Eurosystem’s bond market share at an all-time high: what does it mean for repo markets?," Working Papers 745, DNB.
    • Handle: RePEc:dnb:dnbwpp:745
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    File URL: https://www.dnb.nl/media/kq3peijz/working_paper_no-_745.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Baltzer, Markus & Schlepper, Kathi & Speck, Christian, 2022. "The Eurosystem's asset purchase programmes, securities lending and Bund specialness," Discussion Papers 39/2022, Deutsche Bundesbank.

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    More about this item

    Keywords

    Asset purchases; Unconventional monetary policy; Money Market; Repo Market; Specialness;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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