Yield Determinants and the Role of ESM Loans in the Primary Market for Spanish Sovereign Debt

We investigate the determinants of primary market yields on Spanish sovereign debt, focusing in particular on the role of ESM lending. To this end, we use an innovative multi-stage model to estimate for a given auction day the chosen number of auctions, maturities and target amounts. We do this by addressing endogenous factors with machine learning. The average outstanding maturity is kept stable at a high frequency: longer issues tend to be followed by shorter ones, and vice versa. In the final stage yields are determined. The effects of the different yield determinants are largely as expected, in view of the apparent segmentation of markets across maturities, which gives rise to local preferred habitat effects. The announcement of an ESM programme lowers yields. Moreover, once it is in place, its mere presence reduces short-term yields, but raises long-term yields. A larger ESM interest discount lowers yields across all maturities.