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. Using an innovative multi-stage model addressing endogenous factors with machine learning, we find that a positive shift in the risk-free yield curve and an increase in the CDS spread raise primary yields uniformly across the maturities on issue. Higher inflation raises medium- to long-term yields, while longer outstanding maturities raise short-term yields and lower long-term yields. Larger holdings by the Banco de Espana lower short-term yields and raise medium-term yields. While ESM loans raise yields across maturities, their impact on issuing costs is minimal. Volatility in primary yields increases with the risk-free yield curve and falls with liquidity for short maturities. Central bank holdings lower volatility for medium-term maturities, while ESM debt relief lowers uncertainty at short maturities.