Is the Bond Market Competitive? Evidence from the ECB's Asset Purchase Program

We document a recurring pattern in sovereign bond prices during the Eurosystem's Public Sector Purchase Program (PSPP): a predictable rise towards month-end, followed by a subsequent drop. However, we find no evidence of a correlated pattern in the Eurosystem's trade execution. We propose a dynamic search-bargaining model of Bertrand competition under uncertainty that captures salient elements of the PSPP - in particular the Eurosystem’s fixed monthly purchase targets - in which imperfect competition among dealers generates a predictable pattern in prices that is uncorrelated with the trading volume. Consistent with the model predictions, the price anomaly is more significant: (a) for bonds specifically targeted by the PSPP, (b) during monthly intervals wherein the Eurosystem engages with a lower number of counterparties, and (c) when the Eurosystem targets a larger purchase amount. Finally, we explore the potential consequences of our findings for the design and implementation of future asset purchase programs.