The Eurosystem’s asset purchase programmes, securities lending and bund specialness

Abstract

The Eurosystem’s asset purchase programmes reduced the free float of German Bunds. We study the intended and unintended consequences of asset purchases in the repo market involving Bund collateral. Bunds that are eligible for purchases carry a repo specialness premium even when they are not purchased. This “eligibility premium” is larger than the actual flow effect of purchases. The Bundesbank’s securities lending operations have a flow effect. The effects of purchases and securities lending on repo specialness are relatively small compared to those caused by banks window dressing their balance sheets and by hedging pressure for Bund Futures.