In fact, longerterm sovereign yields become virtually unresponsive to rate cuts in stressed conditions owing to the subdued portfolio rebalancing effects I mentioned earlier and consistent with the evidence recorded after the spread of the pandemic and prior to the launch of the PEPP.
As a result, policy measures that operate primarily through the risk-free curve – like rate cuts – are unlikely to be as effective at the current juncture as they are in non-stressed conditions – whereas policy measures that directly intervene on sovereign yields may in fact become more effective as they directly compress relevant premia in this market segment.