Demand and supply of Italian government bonds during the exit from expansionary monetary policy

12 November 2025

Banca d'Italia today publishes 'Demand and supply of Italian government bonds during the exit from expansionary monetary policy', the new issue of the series 'Markets, infrastructures, payment systems'.

In response to 2022-23 inflationary pressures, the portfolio of assets held by euro-area central banks for monetary policy purposes has gradually shrunk (quantitative tightening), after years of rapid expansion in the Eurosystem's balance sheet. In these circumstances, the capacity of financial markets to continue to absorb the supply of government bonds in an orderly and efficient manner, without any significant impact on prices, is important. Drawing on granular data from the primary and secondary markets for Italian government bonds, this paper investigates Market Absorption Capacity (MAC), defined as a market's ability to respond to supply and demand shocks with limited price impact. Our analysis shows that when Eurosystem purchases were reduced or suspended, private investment in sovereign securities remained stable or increased, with modest and statistically non-significant impacts on issuance costs. However, during periods of market stress, demand from end investors tends to weaken, and issuance costs at auctions rise accordingly.