Non-technical summary of ESM Working Paper 62: Investor activity in EFSF/ESM secondary bond markets

The European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) issue bonds on private capital markets to fund financial assistance for euro area countries in financial distress. These bonds can be traded on secondary markets between investors and financial institutions.

The paper analyses the trading dynamics of these bonds from 2014 to 2020, exploring the roles of different market participants and the impact of digital trading platforms. The authors discovered that private sector investors, particularly fund managers, significantly increased their presence in the market, making bold trades that carry high risks due to their large size or the bonds' extended maturities.

During the COVID-19 pandemic, a fascinating pattern could be observed: investors initially withdrew their capital, only to re-enter the market swiftly as they reassessed the risks involved. This behaviour underscores the stabilising influence of private capital in turbulent times. Interestingly, despite the low-interest-rate environment, there was a marked shift towards longer-term bonds. By 2017, these longer maturities were traded as frequently as their shorter-term counterparts, with a notably diverse range of investors engaging in these transactions.

In addition, the study highlights the growing trend towards digitisation in bond trading. The shift to electronic platforms has been steadily increasing since 2017, unaffected by the pandemic's temporary pause. This digital transition has not disrupted market liquidity but has revealed distinct preferences among investor types regarding their trading methods. These insights into the evolving bond market underscore the critical roles played by private investors, technological advancements, and the resilience of financial markets, offering valuable perspectives for future policymaking and investment strategies.