benoit cœure : bond scarcity and the european central bank's asset purchase programme speech by mr benoit cœure, member of the executive board of the european central bank, at the club de gestion financiere d ’ associes en finance, paris, 3 april 2017. * * * accompanying slides i would like to thank fabian eser and niels krieghoff for their contributions to this speech. i remain solely responsible for the opinions contained herein. i am grateful for the opportunity to speak here today at the club de gestion financiere. in my remarks today i would like to address a topic that has received growing attention in recent months, namely the low level of short - term yields of the euro area ’ s safest sovereign bonds and their apparent disconnect with those of overnight index swaps ( ois ). on the face of it, this is not the sort of topic that you would choose to discuss over breakfast. but despite its technical character, i intend to explain that such a disconnect evidences ongoing structural change in the euro area ’ s bond market and could bear consequences for the transmission of our monetary policy. in what follows i will argue that a confluence of factors – some of them of a temporary and some of them of a more permanent nature – is likely to have contributed to this disconnect. one of these factors, as i will show, is probably related to the ecb ’ s asset purchase programme ( app ), which raises the legitimate question of whether our purchases hamper the smooth functioning of financial markets. my answer today will be that we see no such evidence, but that the governing council continues to monitor very carefully the developments in euro area bond and repo markets. let me start with the facts, however. as you can see on slide 2, ois rates and german government bond yields with a two - year maturity have been intimately connected in the past. the reason is that swap dealers tend to use positions in safe government bonds to hedge interest rate risk on swaps. and with securities issued by the german government generally perceived as bearing very little credit risk, we would expect them to be related to swap rates. this is true for all tenors by the way and is not specific to the two - year rate that i am showing as an example on this slide. now, why then have yields of high credit quality bonds – and i refer to german bonds merely for ease

. the program has been established with the aim to create additional monetary easing effects by encouraging a decline in longer - term interest rates and a reduction in various risk premiums in a situation where there was little room for further declines in short - term interest rates. through the program, the bank – in addition to the increased purchase of jgbs just mentioned – purchases various financial assets, such as cp, corporate bonds, exchange - traded funds ( etfs ), and japan real estate investment trusts ( j - reits ), and conducts fixed - rate funds - supplying operations against pooled collateral whereby funds with a maturity of three or six months are provided at an interest rate of 0. 1 percent. as a result of the most recent increase in the program, the bank ’ s pace of purchasing jgbs will accelerate significantly from about 0. 5 trillion yen per month to about 1. 5 trillion yen. adding up jgb purchases through the program and the bank ’ s regular jgb purchases to meet the trend increase in banknote demand, conducted at a pace of 1. 8 trillion yen per month, the bank will be purchasing a large amount of jgbs until the end of 2012 at the pace of 3. 3 trillion yen per month, or about 40 trillion yen for the year. it should be emphasized, however, that the purpose of this significant scale of jgb purchases is to achieve sustainable growth with price stability, and that the bank rigidly maintains its policy of not conducting purchases of jgbs for the purpose of financing government debt. bis central bankers ’ speeches 2. ensuring financial market stability the bank has been showing its commitment to fully ensure financial market stability through implementing a variety of measures including the utilization of various funds - supplying operations. when uncertainty began to spread in the financial markets just after the earthquake, the bank provided ample funds to the markets, the total amount of which represented a historical high. the bank has also taken measures to provide financial institutions with the confidence that they can obtain sufficient funds whenever necessary. in may 2010, in response to the reemergence of strains in u. s. dollar short - term funding markets, the bank – in coordination with the bank of canada, the bank of england, the ecb, the federal reserve, and the swiss national bank – reestablished the temporary u. s. dollar liquidity swap facility, which had expired, and reintroduced a scheme that would make it possible to conduct the u. s. dollar funds -