With just Eu47m of purchases under the second European Central Bank covered bond purchase programme reported this week, CBPP2 buying is at its slowest since the New Year. Market participants have been content with the slow pace, with some suggesting that greater activity would be counter-productive.

Around three-and-a-half months remain before CBPP2 is due to conclude at the end of October, but only Eu14.359bn of the Eu40bn earmarked for the programme has been spent – a lag of some Eu14.77bn given a theoretical daily run rate of Eu160m.

The ECB reported increases in CBPP2’s total of Eu8m, Eu29m and Eu10m on Monday, Tuesday and today, respectively, with no increase reported on Wednesday and Thursday. The week’s Eu47m total is the lowest since the first week of January, which reflected inactivity over the New Year holiday.

See here for full CBPP2 data:

https://news.coveredbondreport.com/db/CBPP2.php

The most recent new issue eligible for the programme to have settled was a Eu500m five year aircraft Pfandbrief for NordLB, which RBS analysts noted the Eurosystem did not participate in, at least not under CBPP2.

Market participants said the scheme has been overtaken by events on the sovereign level and related measures such as the ECB LTROs.

Florian Eichert, senior covered bond analyst at Crédit Agricole, said that spending has been focussed on the secondary market, a trend that was in evidence in June despite a somewhat more active primary market.

Continued buying of core European covered bonds by core European central banks is counter-productive, he added.

“By doing this, the CBPP is actually not helping anyone but adding to the squeeze in highly rated core sectors,” said Eichert. “We would encourage the central banks to hold fire for now in these sectors and spend the money where it is actually needed – potential Italian primary market deals and secondary purchases in cédulas and Italian OBGs.”

Jörg Homey, head of covered bond research at DZ Bank, said that the Eurosystem is unlikely to spend the Eu40bn earmarked for the purchase programme by the time it is due to run out.

“The ECB is operating CBPP2 with prudence,” he said. “At the moment it is not really needed, but it makes sense for the programme to be continued so that it can be used if a deal needs to be helped over the line, or to support peripheral issues should they emerge.”

Armin Peter, head of covered bond business and syndicate at UBS, questioned the benefit of greater intervention in the secondary market, noting that although this can drive down spreads to more affordable levels some peripheral bonds are already trading through their government debt.

As long as uncertainty dominates the government bond markets there is little point stepping up efforts under CBPP2, he said.

“I would only ask for a more hands-on approach in the covered bond market if the government markets were working properly,” he said. “The programme might be disappointing in terms of how little has been spent but I think the problems are at a higher level.”

Pia Schönwälder, covered bond analyst at BayernLB, believes that the covered bond purchase programme was to a large extent rendered obsolete by the ECB’s three year longer term refinancing operations (LTROs), which created a demand overhang in the market that meant CBPP2 intervention was unnecessary and even counter-productive.

“It is very positive for the market that the covered bond product was yet again chosen by the ECB as a focus for support, but the LTROs ended up being much more important,” she said. “They led to a tightening of secondary market peripheral spreads and allowed Spanish issuers between January and March to launch covered bond benchmarks again.”

It would be positive to see a more focussed buying OBG and cédulas under CBPP2, she said, because these important and large markets are currently dysfunctional.

“But in view of the very high spread levels there is no sign of Italian or Spanish issuers coming to the market as long as they can obtain funding via repo transactions with the ECB,” she added.