European Central Bank working paper analyses PEPP commercial paper purchases and finds higher post-exit yields for heavily supported issuers

The European Central Bank published an ECB Working Paper by Johannes Breckenfelder and Glenn Schepens, which analyses the euro-area non-financial commercial paper market through the March 2020 money market fund run, the ECB’s commercial paper purchases under the Pandemic Emergency Purchase Programme (PEPP), and the subsequent unwind and exit. The paper, which does not necessarily reflect ECB views, finds that PEPP purchases helped restore issuance and improved funding terms for eligible issuers, while the withdrawal of support was associated with higher yields and weaker money market fund engagement for firms that had relied most on the programme. The authors document that the commercial paper market fell sharply in March 2020 as money market funds, which held almost 60% of outstanding non-financial euro-area commercial paper at end-2019, experienced outflows and reduced exposures. Firms were able to replace only 27% of lost market funding through bank credit lines. Under PEPP, the ECB purchased around EUR 35 billion of commercial paper in the first two months, more than 40% of the market’s pre-crisis size, with 81% bought in primary markets, and eligible firms increased issuance volumes, extended maturities and saw lower yields relative to ineligible firms. As the ECB began unwinding in 2021 and ceased purchases entirely by 2023, firms with above-median exposure to ECB purchases faced a larger increase in issuance yields after exit, with an additional 20.2 basis points versus less-exposed firms, alongside lower money market fund holdings and fewer new investor relationships, while credit line take-up did not materially change post-exit.