The market stabilization role of central bank asset purchases: high-frequency evidence from the COVID-19 crisis

We investigate the flow effects of the Eurosystem government bond purchases conducted in Italy during the early stages of the COVID-19 crisis. Using confidential high-frequency data and local projections, we find that the purchase of long-term bonds reduced corresponding yields by an average of 4 to 5 basis points per billion euros on impact. These effects persisted after the purchases and were strongly transmitted along the yield curve, leading to marked improvements in liquidity conditions, while remaining mostly confined to the domestic market. We further document that the effects were considerably more pronounced – nearly doubling in size – at the peak of the crisis, when market liquidity dried up and the euro area bond market became highly fragmented along national borders. Our findings point to a crucial role of actual purchases in stabilizing financial markets, beyond that of purchase announcements. They also support the rationale for more flexible and targeted interventions during periods of market distress.