ECB Policies Involving Government Bond Purchases: Impact and Channels[The “greatest” carry trade ever? Understanding eurozone bank risks]

We evaluate the effects of three European Central Bank (ECB) policies (the Securities Markets Programme (SMP), the Outright Monetary Transactions (OMT), and the Long-Term Refinancing Operations (LTROs)) on government bond yields. We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate credit default swap (CDS) rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the SMP and the OMT, yields fall considerably. Decomposing this fall, default risk accounts for 37% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.