Sovereign bond auctions in the euro area

Euro area governments issue debt via sovereign bond auctions. Auction outcomes were closely scrutinized during the recent financial and sovereign debt crisis. High sovereign yields and high budget deficits resulted in a challenging funding environment for governments, and the success or failure of auctions could be market moving events. This dissertation studies sovereign bond auctions in the euro area, focusing on cross-border effects of sovereign bond auctions, the effect of the success of auctions on secondary markets, the determinants of debt issuance policies and the determinants of the success of auctions. First, based on a model of primary dealers with limited risk-bearing capacity we show that auctions cause cycles in domestic and foreign secondary market yields around the auction date. Second, we develop a model where primary dealers receive private signals about the value of an auctioned bond and show empirically that the success of an auction, as measured by the bid-to-cover ratio, leads to lower secondary market yields after the auction, and that this effect is stronger when market volatility is higher. Third, in line with a model where governments face a trade-off between liquidity preference, roll-over risk and price risk, we find that governments issue debt with a shorter maturity when yields are higher and when the yield curve is steeper. Fourth, we find that high secondary market yields and low secondary market volatility are associated with more successful auctions, and that the success of an auction is related to the success of previous domestic and foreign auctions.