We analyse the market reaction of yields to UK government debt auction announcements to quantify the potential impact of Quantitative Tightening (QT) by the Bank of England. Our results suggest that the yield reaction to debt issuance surprises comes through both duration risk and local supply channels, and depends critically on the level of market stress. Based on these estimates, a fully unanticipated announcement that mimics the Bank’s first annual QT programme would raise 10-year yields by 20bps under low market stress, with the impact from passive unwind broadly equivalent to that from active sales on a pound for pound basis.

This paper explores under what circumstances increases in US Treasury yields spill over into declines in emerging market economy (EME) asset prices. We identify episodes of sharp increases in US 10-year Treasury yields and explore under which conditions these are associated with reductions in EME local currency yields, exchange rates and equity prices. We find that rising US yields are more likely to be associated with adverse outcomes in emerging markets when they reflect (i) a rise in the US term premium, (ii) dollar appreciation and (iii) rising EME inflation expectations. The effects of these variables are highly non-linear and economically significant as well as robust to a variety of sensitivity checks.

In this paper, we quantitatively assess the 'behind-the-curve' behaviour of central banks during the recent inflation surge in Europe. This concept describes a situation in which a central bank reacts with a time lag to the changing economic environment and, as a result, the policy rate deviates from the Taylor rule-like policy rate. The behind-the-curve measure focuses on the duration of the divergence between two policy rates in terms of elapsed time. The Taylor rule-like policy rates for nine European inflation targeting countries are computed from the long-T-small-N panel model with a rich set of time and country-interacted fixed effects. We identify the determinants of behind-the-curve behaviour and assess the impact of this phenomenon on post-episode inflation rates.

High excess liquidity – the amount of central bank reserves held by commercial

banks over and above minimum reserve requirements – in the euro area interbank

market tends to push money market rates down towards the deposit facility rate (DFR) at

which banks can park overnight liquidity with the European Central Bank; by contrast,

upon scarcer liquidity, interbank rates increase towards the ECB’s main refinancing

operations (MRO) rate. This negative relation between excess liquidity and the money

market spread (market rate vs policy rate) has a forward-looking dimension: changing

perceptions of future excess liquidity can affect future expected spreads and thus

impact the term structure of forward rates today. The paper introduces a nonlinear

model of excess liquidity dynamics and money market spreads that formalises this

nexus. We argue that the announcement of stronger-than-expected repayments of

long-term ECB liquidity operations in January 2013 has changed market perceptions

of future excess liquidity and led to an increase in short- to medium-term forward

rates. Using the model, we back out the associated changes in the distribution of

future excess liquidity that match the observed steepening in the forward curve. The mechanism is still relevant at the current juncture: the reduction of the spread between the rate on the MROs and DFR to 15 bps from 50 bps as part of operational framework review announced in March 2024 contains the potential yield curve impact from changing excess liquidity perceptions. We analyze the impact of spread reduction on the future uncertainty of money market rates through the lens of the model.