The Yield curve revisited for crisis period: between contagion, flight to quality and quantitative easing[La structure des taux revisitée pour période de crise : entre contagion, flight to quality et quantitative easing]

This paper aims to evaluate the specific role of volatility and co-volatility risks in the formation of long-term European interest rates over the crisis and post-crisis periods with an active role of the ECB. We propose for that a portfolio choice model with two countries, which generalizes the results of the traditional theory of the term structure of interest rates. Long-term equilibrium rates depend crucially on the covariances between international bond yields anticipated by investors. Positively anticipated covariances amplify the phenomena of fundamentals contagions related to the degradations of public finance debt issuer, while negatively anticipated covariances amplify the phenomena of flight to quality. The econometric approach over the period January 2006 to September 2016 analyses 21 European market pairs in a bivariate GARCH framework. We obtain three important results. 1) The decline of German and French long-term rates very early in the crisis, since March 2011, found a strong support in the reduction in the anticipated covariances towards the peripheral countries, which really amplified the process of flight to quality. 2) The volatility risk premium mechanism on portfolios and bond yields declines sharply during the crisis, and reappears later over the post-OMT period. Everything happens as if the mechanism of international bond portfolio allocation had ceased during the sovereign debt crisis and then reappeared. 3) Acccording to a test a la Forbes and Rigobon [2002], it seems difficult to affirm that QE programmes have led to a significant increase on correlations between bond markets, simply because the correlations were already high before the implementation of QE, particularly since the implementation of the OMT.