ECB asset purchase program leaves substantial mark on yields

The yields on top-grade long-term government bonds have been headed south for two decades or so. Whereas at the turn of the millennium, ten-year German government bonds still offered yields of around 5.5%, this figure had, at times, fallen to less than 0.1% in April of this year. Although macroeconomic developments – much lower inflation rates and economic growth erring on the moderate side overall – can doubtlessly be held accountable for part of this downward trend, they do not explain why long-term interest rates have been flirting with the zero threshold. The central banks are a weighty player when it comes to determining yields on the bond market. They not only largely determine the interest rate level for short maturities by setting key rates, but, the more they opt to intervene directly in the markets, the more influence they end up exerting over long-term yields, too.

Quantifying the impact that the central banks have on yields has become a trickier business. Whereas prior to the global economic and financial crisis of 2008/2009, key rates were the only monetary policy instrument that could be used to explain long-term yields, unconventional monetary policies are now also extremely significant when it comes to determining yields. The bond purchase programs, in particular, are having a direct impact on long-term interest rates without being accompanied by any variation in key interest rates.

Download PDF (1006 kb)