Italian and Spanish sovereign bond yields respond to ECB policy – researcher

The response of Irish and Spanish sovereign debt yields to the European Central Bank’s monetary policy announcements was strongly affected by the eurozone’s financial crisis, an economic letter published by the Central Bank of Ireland finds. 

In The Effect of ECB Policy Announcements on Sovereign Yields: A Return to Normal Transmission?, Robert Goodhead looks at movements in forward contracts for debt issued by the governments of the eurozone’s four largest economies.

The author examines how forward contracts for German, French, Italian and French sovereign bond yields moved on days when the ECB issued monetary policy decisions. Data from between 1999 and 2017 is examined.

Goodhead says the response of Italian and Spanish sovereign bonds to monetary policy announcements showed different patterns before, during and after the eurozone’s sovereign debt crisis.

Movements in forward contracts for French and German sovereign debt were found to be largely the same throughout. By contrast, Italian and Spanish sovereign bond yields failed to respond to changes in ECB monetary policy.

During the post-crisis period, which the author dates from September 2012 to December 2017, Italian and Spanish bonds again responded to the ECB’s monetary policy announcements as they had before the crisis.