Market participants have questioned the likelihood and wisdom of an early end to the second ECB covered bond purchase programme – after an FT article suggested this was under consideration – noting that the Eurosystem can already adjust its participation appropriately.

Settled purchases under CBPP2 stood at Eu8.754bn today (Thursday), bringing the daily average to Eu94.13m. Assuming that a daily average spend of Eu160m is needed for the Eu40bn earmarked for the programme to be fully spent by the time the programme is due to end in October, the Eurosystem is some Eu7bn behind schedule.

The Financial Times article said that the lag in purchases under the programme is a sign that the ECB could abandon CBPP2, and that an improvement in financial market confidence on the back of Eu1tr of liquidity provided via two three year longer term refinancing operations (LTROs) “means the covered bond programme is no longer seen as necessary in Frankfurt, and its future has already been discussed by the governing council”.

A spokesperson at the ECB told The Covered Bond Report that it had no comment on this, and referred to the disclosure of settled purchases under CBPP2 on the ECB website, saying that “you have to go by that”.

A spokesperson at Germany’s central bank, meanwhile, was quoted in media reports as saying that the Bundesbank is not pushing for an exit from the covered bond purchase programme, and that it us up to the ECB governing council to decide at an appropriate time on the future of the programme.

Covered bond market participants said that the improvement in market conditions following the LTROs has reduced the need for support via CBPP2, but played down the prospects of a definitive end to the programme even if adjustments to participation under CBPP2 could be made.

Jörg Homey, head of covered bond research at DZ Bank, questioned the wisdom of shutting down the programme prematurely.

“The ECB can do whatever it chooses to do,” he said. “However, why close down something that they could maybe use in a few months’ time?

“If there is anything the financial crisis has taught us, it is that the world can change quickly.”

He questioned why the ECB should now declare to close down CBPP2 without any external pressure, noting that US federal regulators had welcomed developments in the euro-zone, and encouraged the use of further firewalls.

Federal Reserve chairmen Ben Bernanke yesterday (Wednesday) announced to Congress that full resolution of the euro-zone crisis would involve expansion of firewalls to guard against contagion.

A covered bond syndicate official also took a dim view of an early end to CBPP2.

“Because the market backdrop is very strong, the ECB buying has been a waste of money,” he said. “But ending it is just silly.

“They should just not buy anything – slow it down and extend the buying period.”

He said an early exit could have a more negative impact.

“Market sentiment could turn pretty quickly, and in a couple months we might need the programme,” he said. “It could have a worse impact for the market if they had to reintroduce it.

“This is an insurance policy; it needs to be there if things turn sour.”

Florian Eichert, senior covered bond analyst at Crédit Agricole, said he does not expect an outright termination of CBPP2 by the Eurosystem.

Market sentiment and smaller issuers would be temporarily adversely affected if the Eurosystem were to announce the closure of CBPP2, he said, and smaller issuers would likely have to temporarily put issuance plans on hold.

“This will, however, clear away the moment investors see continuous central bank buying in order books as the LTRO effect is still strong and investors have cash to invest,” he said, noting that central banks have been investors in covered bonds long before even the first purchase programme was established.

Ralf Grossman, head of covered bond origination at Société Générale, also played down the likelihood of the ECB pulling the plug on the purchase programme.

“I don’t think they will stop it right away,” he said. “They may scale back participation a bit, and in some deals it is arguably not needed, but they will keep their powder dry to come back if necessary.”

He said that he does not expect the ECB to make a formal announcement about the future of the programme, but that it will rather adjust its purchases as it deems necessary.

“It’s even better if they don’t need to spend money,” he said. “Supply volumes are a bit lower and the participation of the ECB under the purchase programme is in some cases not needed.”

Bernd Volk, head of covered bond research at Deutsche Bank, said that the ECB should have the flexibility to stop and re-enter CBPP2 according to market conditions, even without a formal announcement.

“Currently CBPP2 seems not needed,” he said, “at least not with the stated intention to kick-start the primary market.”

Many issuers from core jurisdictions are refraining from tapping the primary because of the LTROs, he said, while weak peripheral issuers still struggle to issue at spreads they would consider reasonable, and “the ECB kick-starting may not be sufficient to overcome investor concerns.”

Crédit Agricole’s Eichert said that while most of the recent deals would have been sold without CBPP2 orders, smaller issuers from non-core jurisdictions could still need the support of the programme.

“A lot can happen between now and when the programme runs out in October,” he said.

Deutsche’s Volk questioned whether any formal termination of CBPP2 by the ECB should be seen as a sign of the central bank exiting its non-standard measures, noting that the non-standard CBPP2 and three year LTRO measures are anyway partly contradictory.

Jennifer Levy, covered bond analyst at Natixis, said that she would not be surprised if the Eurosystem scaled back its purchases under the programme given that it is already lagging a theoretical run rate and that there is other support for banks.

“It could be possible, but the ECB has not confirmed anything so we have to be cautious,” she said. “All else being equal it would not be something to be frightened of given that even with weak ECB participation in the market, spreads continue to tighten.”

She said that the second purchase programme has to date not been as helpful as its predecessor in 2009, but that prevailing market conditions are very different to those in place at the time of CBPP1.