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Bid-to-cover and yield changes around public debt auctions in the Euro Area

This paper explores how the success of euro-area public debt auctions, as measured by their bid-to-cover ratios, impacts on the secondary market yields on euro-area public debt. Two major results emerge from our results: (1) less successful auctions produce a higher secondary market yield immediately following the auction, and (2) this effect of the auction’s success is larger when market volatility is higher. Apparently, the information content of an unsuccessful auction is higher when markets are more stressed. Both results can be explained in the context of a simple theoretical framework in which the primary dealers, who buy the newly-issued debt, receive a signal about the fundamental value of the auctioned asset. Typically, the signal would come from the demand of their clients. Given the amount of debt on offer a more positive signal generates more demand from the primary dealers, i.e. the bid-to-cover ratio will be higher, thereby producing a higher equilibrium asset price. Moreover, for given bid-to-cover ratio, the model predicts the effect to be larger when market volatility is higher. […]