Demand shocks for public debt in the Eurozone

In this paper we use high-frequency (intraday) government bond futures price changes around German and Italian Treasury auctions to identify unexpected shifts in the demand for public debt. Estimates show that positive demand shocks lead to large and persistent negative movements in Treasury yields. There is also evidence of significant spillover effects into Treasury bond, equity and corporate bond markets of other euro area countries. We find interesting differences in the effects of demands shocks between the two countries, which are consistent with the œsafe-haven status of German bonds versus the œhigh-debt status of Italian Treasuries. Results also suggest that these effects are stronger during periods of high financial stress.

Keywords: Sovereign bonds; Primary market; High-frequency identification; Yield curve
JEL codes F4; E43; G15

Working paper no. 674