Sovereign yields are central to the transmission of euro area monetary policy, since sovereign bond yields in each member country are the basis for funding costs for households, corporates and banks (in addition to governments). In relation to the risk-free yields, Chart 7 shows a significant lowering of the ten-year risk-free rate over the course of 2020.
Since the short-term risk-free rate is anchored by the deposit facility rate level of minus 50 basis points and the ten-year rate fell towards those levels, the yield curve was relatively flat by December 2020, prompting a pivot in the conduct of the PEPP towards an emphasis on maintaining favourable financing conditions – in particular, preventing a tightening in financing conditions that would have been inconsistent with countering the downward impact of the pandemic on the projected path of inflation.