THE SHORT-TERM IMPACT OF THE ECB'S PEPP ANNOUNCEMENT ON EURO AREA BOND YIELDS

Abstract

This study examines the short-term effects of the European Central Bank’s Pandemic Emergency Purchase Programme (PEPP) announcement on 10-year government bond yields in eleven euro area countries. Employing an event study methodology, it analyses bond yield changes on March 19th, 2020, the first trading day after the late-evening announcement. The findings reveal that the PEPP announcement significantly reduced bond yields, with peripheral economies like Greece and Italy experiencing the most significant impacts, reflecting the program’s effectiveness in stabilising vulnerable markets. Core countries, such as Germany and the Netherlands, exhibited weaker responses, consistent with their lower pre-announcement sovereign risk. Control variables, including stock market indices, the USD/EUR exchange rate, and the Citigroup Economic Surprise Index (CESI), were incorporated to isolate the PEPP’s effects. While the exchange rate had a pronounced influence, economic surprises and stock market indices played a minimal role. The results highlight the PEPP’s immediate success in mitigating market instability and reducing borrowing costs for high-risk countries, underscoring the ECB’s critical role in managing financial crises. This study contributes to understanding the effectiveness of unconventional monetary policies in addressing market disruptions during the COVID-19 pandemic.