The European Central Bank published a Working Paper by Adriana Grasso and Andrea Poinelli analysing how flexibility in the day-to-day implementation of Eurosystem sovereign bond purchases affected euro area repo market functioning. Using the Public Sector Purchase Programme as the main setting, the paper finds that steering purchases towards less scarce bonds helped limit collateral scarcity and prevented “specialness” premiums from widening as much as they otherwise would have. Empirically, the study estimates that, over 2015-2019, a EUR 100 million deviation from a market-neutral purchase allocation increased special collateral repo rates by about 0.41 basis points, implying a reduction in specialness for the affected bond, with results reported as robust in the 2020-2022 period. The analysis also finds that repo specialness is associated with larger deviations from the market-neutral allocation, consistent with portfolio managers reacting to repo conditions, and that effects are larger in the most special transactions (around 1.37–1.48 basis points per EUR 100 million). Separately, the Eurosystem’s Securities Lending Facility is estimated to have alleviated scarcity when lending is against cash collateral, with EUR 100 million of lending associated with a 0.16–0.20 basis point increase in repo rates.
European Central Bank 2025-01-15
European Central Bank working paper finds flexible asset purchases mitigated repo market specialness under the Asset Purchase Programme
The European Central Bank published a Working Paper analyzing the impact of Eurosystem sovereign bond purchase flexibility on euro area repo market functioning. The study finds that steering purchases towards less scarce bonds limited collateral scarcity and reduced "specialness" premiums. Additionally, the Eurosystem’s Securities Lending Facility alleviated scarcity, with cash collateral lending linked to increased repo rates.