The Euro-Area Government Securities Markets. Recent Developments and Implications for Market Functioning
This paper analyses recent key developments in euro-area government bond markets and their main implications for central banks and for market functioning. The introduction of the euro is found to have significantly affected the relative pricing of securities. The spreads over German bonds of previously high-yield debt have narrowed significantly whereas the spreads of all other euro-area sovereign debt have widened following the introduction of the euro. Market microstructure factors, such as relative market liquidity and the cheapest-to-deliver status of bonds, are also found to play a part in determining relative prices in addition to differences in credit risk. Finally, the evidence suggests that the reduction in the relative supply of government bonds has hitherto had a limited effect in the euro area, in contrast to the evidence in the US market.
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