[17] Finally, the negative interest rate policy also reinforces our targeted long-term refinancing operations (TLTROs). [18] Under the TLTROs, banks can refinance with the ECB at very favourable conditions: under the second and third wave of that programme (TLTRO II and III), borrowing rates in the TLTROs can be as low as the deposit facility rate (which is negative) if lending volume targets are met. Accordingly, the presence of negative rates provides a strong incentive for banks to participate in the TLTROs, which support credit provision to the real economy at attractive conditions. The transmission of asset purchases to the yield curve Let me now turn to large-scale asset purchases, including our own asset purchase programme (APP). There is a wide array of studies quantifying the effects of various forms of asset purchases on financial markets and macroeconomic variables. Results vary regarding the quantitative impact but there is a broad consensus that central bank asset purchases lead to a flattening of the curve, since the yields of longerterm bonds tend to decline by more than those of short-term bonds. A first look at the stylised facts using the same approach that I outlined earlier confirms this pattern for the euro area. Extracting a quantitative easing factor from high-frequency interest rates and other financial market data confirms that news about ECB asset purchases had yield compression and flattening effects on the term structure, as shown in Chart 6.
[23] One way in which the portfolio rebalancing channel may affect bond yields is through a direct impact on demand and supply conditions in the maturity segment in which we purchase. For instance, buying a French eight-year bond decreases the supply of that bond available in the market. For given demand, this drives up the price of the bond and compresses its yield. Securities of similar maturity are close substitutes, so their yield would also be affected, but those with very short and much longer maturities would not be greatly affected. This is why this channel is often referred to as the “local supply channel”. Another way in which the portfolio rebalancing channel is set in motion is through duration extraction. [24] The formalisation of this idea is based on prominent work by Vayanos and Vila (2009). [25] Let me just give you the basic mechanism. Going back to my previous example, under the duration extraction channel, the purchase of a French bond not only affects demand and supply locally but also reduces the aggregate risk to be borne by market participants. This leads price-sensitive investors to re-adjust their bond portfolio across maturities given their overall risk-bearing capacity. In terms of asset pricing terminology, central bank bond purchases decrease the market price of duration risk (the expected excess return on a long-  term bond per unit of risk). As I explained earlier, excess returns constitute the term premium component of long-term bond yields, so term premia and overall bond yields decline.