Most short-term interest rates in the euro area are below the European Central Bank deposit facility rate, the rate at which the central bank remunerates banks for excess reserves. This coincided with the start of the Public Sector Purchase Program (PSPP) launched in March 2015. In this paper, we explore empirically the interactions between the PSPP and repo rates. Using proprietary data from PSPP purchases and repo transactions for specific (“special”) securities, we assess the scarcity channel of PSPP and its impact on repo rates. We estimate that purchasing 1% of a bond outstanding is associated with a decline of its repo rate of 0.78 basis points.

Using security-level holdings for all euro-area investors, we study portfolio rebalancing during the quantitative easing program from March 2015 to December 2017. Foreign investors outside the euro area accommodated most of the Eurosystem’s purchases. Duration, government credit, and corporate credit risk did not get concentrated in particular regions or investor sectors. We estimate a demand system for government bonds by instrumental variables to relate portfolio rebalancing to yield changes. Government bond yields decreased by 65 basis points on average, and this estimate varies from 38 to 83 basis points across countries.

We use new and comprehensive data on the security holdings of euro-area investors to document facts about the ongoing quantitative easing program. The holdings of purchase-eligible government bonds have strong home bias not only for banks but also for insurance companies, pension funds, and mutual funds, especially in the vulnerable countries. In response to the program, foreign investors sold most of the purchase-eligible government bonds. Banks also sold purchase-eligible government bonds to a lesser extent, but insurance companies and pension funds bought them. Thus, quantitative easing may have reduced the duration mismatch for these institutions.