Tracing the Impact of the ECB's Asset Purchase Program on the Yield Curve

We trace the impact of the European Central Bank's (ECB) asset purchase program (APP) on the yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the "freefloat of duration risk" borne by arbitrageurs. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia. We estimate the stock of current and expected future APP holdings to reduce the 10-year yield by almost 1 percentage point. This reduction is persistent, with a half-life of five years.