into short positions. so, at face value, price actions in one market could spill over to the other. but identifying the direction of spillover is not always easy. for example, there is evidence of a spillover from repo markets to bond markets in the us : declines in the supply of collateral, for example as a result of central bank asset purchase programmes, lead to a decline in treasury special collateral rates, which also passes through to treasury market prices. 3 interestingly, the authors find that these impacts are larger for shortterm securities. so bonds that trade special in the repo market should also trade at a premium in the cash market. but this is not what we always observe in the euro area. indeed, for the euro area it has proven difficult to establish a robust link between developments in the repo and the cash bond market. although swap spreads are the largest at the short end of the curve, bund specialness in the repo market is concentrated at the medium to long end of the curve. this is shown on slide 11. this suggests two things : first, scarcity at the front end of the bund cash market, as signalled by the wide swap spread, does not seem to have led to a rise in the specialness premium of shortdated bonds in the repo market of equal proportion. second, the specialness of medium to longterm bonds in the repo market has not translated into a similar spread widening between bunds and ois in the cash market. one way to make sense of these developments is to look at how bonds are channelled back into the ( repo ) market. for example, it could be that holders of short - term german government bonds – mainly non - euro area investors, as i mentioned earlier – are generally willing to provide them in sufficient quantity in the repo market. this might explain why short - term bunds tend to trade less “ special ”. at the same time, pspp purchases in germany have long been concentrated in medium to longterm maturities due to the restriction not to conduct purchases below the dfr. as early as april 6 / 8 bis central bankers'speeches 2015, securities purchased under the pspp have been made available for lending in a decentralised and cash - neutral manner by eurosystem central banks. 4 but i think it is fair to say that the initial restriction on lending bonds only against other securities was too penalising and is likely to have

low levels we are currently seeing. in what follows i will discuss in more detail : ( i ) the factors that we think have contributed to recent developments and ( ii ) what they may imply for policy. in doing so, i will also try to explain why we observed an immediate reaction of the 10 - year swap spread to the announcement of the app, while movements at the short end only seem to come to the fore as the implementation of the app gradually proceeds. the demand for short - term safe government bonds i see three main reasons for the growing demand for short - term safe bonds : regulatory factors, flight to safety as well as the direct and indirect effects of the app. in the short run, these factors can all affect market prices if the supply of these bonds is inelastic. i will come back to this later. regulation regulation is the first factor that could have contributed to the strong increase in the demand for safe and short - dated assets, although not for the reasons one might think of at first. 1 regulation, as you know, does not happen overnight. it is a long and often strenuous process. but in recent years several new regulations have come into force. for example, a number of liquidity regulations affecting banks such as the net stable funding ratio ( nsfr ) and the liquidity coverage ratio ( lcr ) require banks to hold a sufficient quantity of highquality liquid assets. so, it is natural to think that these regulations would bump up demand for government bonds. but it is not so trivial. indeed, there is currently well over €1. 5 trillion in excess liquidity in the euro area banking system. and because central bank reserves count as highquality liquid assets, these regulations are unlikely to be the main driver of demand by banks for high - quality liquid safe bonds in large quantities. central bank reserves and very safe government bonds of short duration are in many ways close substitutes. by implication, therefore, it seems likely that mainly regulations other than the lcr, the nsfr or 2 / 8 bis central bankers'speeches the leverage ratio ( lr ) have created incentives to hold an increasingly larger share of government bonds, which in particularly seem to affect actors other than banks. solvency ii, for example, has made it more attractive for insurers to hold cash - like securities, such as aaa - rated bonds, rather than holding cash in a bank account. also, the mandatory posting of collateral for uncleared derivatives, as