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Sovereign bond auctions in the euro areaHanson, J.

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Citation for published version (APA):Hanson, J. (2018). Sovereign bond auctions in the euro area

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Download date: 25 Feb 2019

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Summary

This dissertation studies sovereign bond auctions in the euro area. Euro

area governments use sovereign bond auctions to refinance the

outstanding stock of debt and to finance budget deficits. During the recent

financial and sovereign debt crisis, high sovereign yields and high budget

deficits resulted in a challenging funding environment for governments.

Auction outcomes were closely scrutinized, and the success or failure of

auctions could be market moving events. It is therefore important to study

the determinants of successful sovereign bond auctions and their domestic

and cross-border effects.

In Chapter 2 we study cross-border spillovers of sovereign bond

auctions. Participation to sovereign bond auctions is limited to a selected

group of financial institutions. These primary dealers take large volumes

of sovereign debt on their books around auctions. We develop a model

where primary dealers have limited risk-bearing capacity and want to be

compensated for the concentration of bonds on their books. This results in

a peak in sovereign bond yields around auctions. This auction cycle is

larger when markets are volatile. When primary dealers are active across

borders and foreign bonds are regarded as close substitutes to domestic

bonds, domestic auctions cause an auction cycle in foreign yields.

Consistent with the model, we find evidence for domestic and cross-

border auction cycles. Domestic cycles are stronger in the crisis period,

while cross-border cycles are stronger in the pre-crisis period, which is

likely the result of retrenching financial integration during the crisis. The

finding of cross-border auction cycles suggest that it is costly if

governments hold auctions at the same date.

220

Chapter 3 analyzes the effects of the success or failure of an

auction. We measure the success of an auction with the bid-to-cover ratio.

This is a measure of the total amount of bids placed during the auction,

divided by the issuance volume. A high volume of bids relative to supply

indicates a successful auction. We find that a successful auction results in

a reduction in secondary market yields following the auction. This effect

is stronger in a volatile market environment. These results are in line with

a model where primary dealers receive signals about the value of the

auctioned bond. Such signals may for example come from investors who

place orders with primary dealers prior to the auction. This finding

suggests that it could be costly if governments set ambitious funding

targets when markets are volatile, because the costs associated with a

failed auction are relatively high.

Chapter 4 focuses on the debt management strategy of euro area

governments. We explore the drivers of the maturity of newly issued debt.

We develop a model where investors have a preference for short-term

debt, due to price risk of long-term debt and their preference for liquid

debt. The government faces a trade-off between lower funding costs for

issuance of short-term debt, and lower roll-over risk for long-term debt.

We find that the average maturity of newly issued debt is negatively

related the spread between long- and short-term yields and to the level of

yields. Our analysis of drivers of the maturity choice of governments

suggests a role for liquidity preference of investors.

In Chapter 5 we study the determinants of the success of

sovereign bond auctions, as measured by the bid-to-cover ratio. We find

that an environment of high secondary market yields and low secondary

market volatility is associated with more successful auctions. We provide

some evidence of flight-to-safety effects during the crisis. We also show a

positive relationship between the outcome of the current auction and the

221

success of the previous domestic auction, and we find positive spillovers

from the success of foreign auctions to domestic auctions

Taken together, the results in this dissertation suggest an interplay

between sovereign debt auctions and domestic and foreign secondary

market yields. This interplay depends on the success of the auctions, the

level of secondary market yields and on market volatility. The analysis

and results in this dissertation suggest a number of avenues for further

research. First, the spillovers around sovereign debt auctions could be

explored further, for example by investigating spillovers from U.S.

Treasury auctions on sovereign bond yields in the Eurozone. Second, the

interaction between monetary policy and sovereign bond auctions

deserves further attention. A relevant question is the relation between

ECB purchases of sovereign bonds and the maturity of newly issued debt.

Another question is the effect of these purchases on the size of the auction

cycle.

222

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Dutch summary

Deze dissertatie onderzoekt veilingen van overheidsobligaties in de

Eurozone. Overheden in de Eurozone gebruiken veilingen om

overheidsschuld te herfinancieren en om begrotingstekorten te

financieren. Tijdens de financiële crisis leidden hoge rentes en hoge

tekorten tot een uitdagende financieringsomgeving voor overheden.

Uitkomsten van veilingen werden nauwgezet gevolgd, en het succes of het

falen van een veiling kon markten sterk beïnvloeden. Tegen deze

achtergrond is het belangrijk om de kenmerken van succesvolle veilingen

te bestuderen, en om te analyseren wat de binnenlandse en

grensoverschrijdende effecten van veilingen zijn.

In Hoofdstuk 2 bestuderen we grensoverschrijdende spillover-

effecten van overheidsveilingen. Deelname aan veilingen is beperkt tot

een kleine groep financiële instellingen. Deze primary dealers nemen

rondom veilingen grote hoeveelheden overheidsobligaties op hun boeken.

Wij ontwikkelen een model waarin het risicodragend vermogen van

primary dealers beperkt is. Zij willen daarom gecompenseerd worden

voor de concentratie van obligaties op hun balans. Dit resulteert in een

piek in de rente op overheidsobligaties rondom veilingen. Deze aucion

cycle is groter in geval van marktvolatiliteit. Wanneer primary dealers

grensoverschrijdend actief zijn en buitenlandse obligaties gezien worden

als substituut voor binnenlandse obligaties, voorspelt ons model dat

binnenlandse veilingen tot een auction cycle in buitenlandse rentes leiden.

In lijn met de uitkomsten van het model vinden we empirisch bewijs voor

binnenlandse en grensoverschrijdende auction cycles. Binnenlandse cycles

zijn groter tijdens de financiële crisis, terwijl grensoverschrijdende cycles

groter zijn in de periode voor de crisis. Dit is waarschijnlijk het gevolg

232

van afnemende financiële integratie tijdens de crisis. Ons resultaat dat

auction cycles grensoverschrijdend zijn, suggereert dat het duur is als

verschillende overheden op dezelfde dag een veiling houden. De piek in

de rente rondom de veiling in het ene land heeft immers een effect op de

financieringskosten van de overheid in het andere land, en vice versa.

Hoofdstuk 3 analyseert het effect van het succes of het

mislukken van een veiling. We gebruiken de bid-to-cover ratio om het

succes van een veiling te meten. Dit is een maatstaf van de hoeveelheid

biedingen tijdens de veiling gedeeld door het uitgiftevolume. Wanneer de

hoeveelheid biedingen hoog is in verhouding tot het uitgiftevolume, is

sprake van een succesvolle veiling. Wij vinden dat een succesvolle veiling

gepaard gaat met een daling in rentes op secundaire markten na afloop van

de veiling. Dit effect is sterker wanneer markten volatiel zijn. Deze

resultaten zijn in lijn met een model waarin primary dealers voorafgaand

aan de veiling signalen ontvangen over de waarde van de geveilde

obligatie. Zulke signalen kunnen bijvoorbeeld afkomstig zijn van

investeerders die orders plaatsen bij primary dealers voorafgaand aan een

veiling. De resultaten in dit hoofdstuk suggereren dat het duur kan zijn

wanneer overheden ambitieuze financieringsdoelen stellen voor veilingen

die plaatsvinden in een volatiele marktomgeving, omdat de kosten van een

mislukte veiling dan relatief hoog zijn.

Hoofdstuk 4 richt zich op de financieringsstrategie van overheden

in de Eurozone. We onderzoeken de factoren die de looptijd van nieuwe

schuld bepalen. We ontwikkelen een model waarin investeerders een

voorkeur hebben voor schuld met een korte looptijd vanwege het

prijsrisico van obligaties met een lange looptijd, en vanwege hun voorkeur

voor liquide obligaties. De overheid moet een afweging maken tussen

lagere financieringskosten bij uitgifte van obligaties met een korte

looptijd, en een lager herfinancieringsrisico bij uitgifte van obligaties met

233

een lange looptijd. Uit onze resultaten volgt dat de gemiddelde looptijd

van nieuwe obligaties een negatief verband heeft met de spread tussen de

rente op obligaties met een lange en korte looptijd, en met het renteniveau.

Onze analyse van de onderliggende factoren suggereert een rol voor een

voorkeur van investeerders voor liquide obligaties.

In hoofdstuk 5 bestuderen we welke factoren bepalend zijn voor

het succes van veilingen van overheidsobligaties. We gebruiken de bid-to-

cover ratio om het succes van een veiling te meten. We vinden dat

veilingen gemiddeld genomen meer succesvol zijn in een omgeving van

lage rentes en lage volatiliteit op secundaire markten. We vinden ook enig

bewijs voor flight-to-safety effecten tijdens de crisis. Daarnaast laten we

een positief verband zien tussen de uitkomst van de huidige veiling en het

succes van de vorige binnenlandse veiling, en we vinden positieve

spillover-effecten van het succes van buitenlandse veilingen naar

binnenlandse veilingen.

De resultaten in deze dissertatie laten een wisselwerking zien

tussen veilingen van overheidsobligaties en rentes op binnenlandse en

buitenlandse secundaire markten. Deze wisselwerking is afhankelijk van

het succes van de veiling, het niveau van de rentes op secundaire markten

en van marktvolatiliteit. De analyse en resultaten in deze dissertatie

suggereren een aantal mogelijke onderwerpen voor vervolgonderzoek.

Ten eerste zouden de spillover-effecten rondom veilingen van

overheidsobligaties verder kunnen worden onderzocht, bijvoorbeeld door

spillover-effecten van veilingen door de Amerikaanse Treasury op rentes

in de Eurozone te analyseren. Ten tweede is de interactie tussen monetair

beleid en veilingen van overheidsobligaties een interessant thema voor

vervolgonderzoek. Een relevant onderwerp is het verband tussen het

opkoopprogramma van overheidsobligaties door de ECB en de looptijd

van nieuwe obligatie-uitgiftes door overheden. Ook zou gekeken kunnen

234

worden naar het effect van opkoop van het opkoopprogramma van de

ECB op de omvang van de auction cycle.