When the European Central Bank bought government bonds worth roughly 30% of euro-area GDP between 2015 and 2021, it inadvertently lowered safety premiums by as much as 30 basis points, partially offsetting the intended decline in bond yields. That's the conclusion of a new study published June 22, 2026, by researchers at the Federal Reserve Bank of San Francisco, which examines how central bank bond purchases affect the price investors are willing to pay for safe assets. The research reveals an important trade-off: when central banks pay for risky bonds using their own ultra-safe reserves, they flood the market with safe assets, making them less precious and reducing the safety premium that safe bonds can command.
The study measured safety premiums for government bonds from four AAA-rated countries—Denmark, Germany, Sweden, and Switzerland—throughout the ECB's purchasing period. Germany showed the highest average safety premium at 124 basis points, followed by Switzerland at 70 basis points, Sweden at 54, and Denmark at just 16 basis points. The analysis found that for every 1 percentage point of euro-area GDP that the ECB spent on bond purchases, safety premiums across these four countries fell by about 1 basis point on average. At its peak in 2022, the Eurosystem held assets equivalent to about 37% of euro-area nominal GDP, with government bonds representing 32% of GDP. The ECB's largest program, the Public Sector Purchase Programme, bought bonds from member states in proportion to each country's share of the ECB's total capital, sweeping up both safe low-yielding bonds from core countries like Germany and France and riskier high-yield bonds from peripheral countries such as Italy and Spain.
The researchers write that the cumulative effect amounted to "almost half" of the average 66-basis-point safety premium observed across the four countries during the sample period, calling it "an economically significant impact." According to the authors, the statistical model incorporated a large number of variables to account for other factors like investor risk sentiment and general financial market uncertainty, allowing them to "conclude with confidence that our results are unlikely to be driven by other factors." The report emphasizes that this effect represents a partial offset to the general decline in European interest rates from the ECB's bond purchases, noting that the mechanism can "to some extent, lessen the effectiveness of central bank asset purchases in lowering the very safest government bond yields."
The underlying mechanism works like this: safety premiums reflect what investors will pay for high-quality assets that can be sold anytime, and these premiums rise when safe assets are scarce and fall when they're plentiful. When the ECB bought risky peripheral bonds and paid for them by crediting banks with safe central bank reserves—the safest and most liquid assets available—it effectively converted risky assets into safe ones. This increased the total supply of safe assets in the economy, making investors less willing to pay a high price for other safe bonds and thereby pushing up yields on those bonds. The report explains that bonds from euro-area peripheral countries carried both credit risk (the risk of not receiving promised payments) and redenomination risk (the risk of a country abandoning the euro), so replacing them with reserves substantially altered the safe asset landscape. Because financial markets are globally integrated, the effects rippled beyond the euro area, affecting bond markets in neighboring countries like Switzerland and Sweden.
The findings point to an important international spillover effect that central banks should consider when deploying large-scale asset purchases. The authors conclude that "the impact on the relative scarcity of safe assets partially offsets the decline in yields for other safe government bond markets," suggesting that this mechanism can reduce a central bank's effectiveness in using bond purchases to lower interest rates in the safest markets. The research offers a more complete picture of how quantitative easing programs work: they push down yields through direct purchases, but simultaneously reduce the safety premium by increasing the supply of safe assets, creating a countervailing force that limits the overall impact on the safest bonds.