The Effect of Monetary Policy on the European Corporate Bond Market - Evidence from the yield and credit spread curve term structure

Sammanfattning: This paper examines the effect of monetary policy mechanisms used by the European Central Bank on the euro-denominated corporate bond market. The focus of the paper is to analyse the impact of the central bank set interest rate for main refinancing operations (MRO) and two of the recent quantitative easing programmes - Public Sector Purchase Programme and Corporate Sector Purchase Programme - on the entire corporate yield curve. We achieve this by examining the changes in both the yield and the credit spread curve of the bonds through the level, slope and curvature factors. We further examine the curves of three separate credit ratings - AA, A and BBB - to get a clearer and more certain overview of the effects. The paper finds that the QE programmes push yields and credit spreads down, while a low MRO interest rate leads to decreased yields, but slightly increased credit spreads. The results of our analysis indicate that the policy mechanisms have the most universal effect on yield and credit spread curve levels, while the effect on slopes and curvatures is more varied and unclear.