Just over three weeks remain before the second ECB covered bond purchase programme is due to end and less than half of the earmarked Eu40bn has been spent, with market participants noting it was sidelined by developments such as the LTROs, but still sent out an important message.

Up to Eu40bn was due to be spent by the Eurosystem under the programme, which was announced in October last year and given a maximum lifespan of around 11 months, based on purchases starting in November 2011 and expected to be “fully implemented by the end of October 2012 at the latest”.

As of today (Tuesday) around Eu16bn had been spent under CBPP2, although the daily figure reported by the ECB only captures covered bond purchases settled by the preceding day. This means that roughly 40% of the Eu40bn allocated to the scheme has been disbursed, in contrast to the first covered bond purchase programme, which essentially reached the maximum volume at which it had been sized, Eu60bn.

Reuters yesterday (Monday) cited Eurosystem sources as saying that the programme would be concluded as planned with Eu24bn remaining unspent.

An ECB spokesperson told The Covered Bond Report he could not comment on the schedule for concluding CBPP2.

The persistent underspend under CBPP2 has not tended to be viewed critically by market participants, however, given the extent to which considerations about sovereign risk overshadowed the market, a problem that was recently addressed via the introduction of Outright Monetary Transactions (OMTs) by the ECB.

Johannes Rudolph, head of covered bond research at HSBC Trinkaus, said that CBPP2 became almost irrelevant as a result of the ECB’s three year longer term refinancing operations (LTROs), which offered banks significantly cheaper funds than they could have borrowed in the capital market.

“The programme made a difference before the introduction of the LTROs,” he said, “but their medicine was much stronger and therefore overtook that of the covered bond purchase programme.”

The dynamic, or lack thereof, in the programme was also addressed by the ECB itself, with president Mario Draghi at a press conference in April noting that the central bank “slowed down considerably” CBPP2 in response to improved market conditions following the LTROs. At the time Draghi said that the ECB would be monitoring the appropriateness of the programme.

Bernd Volk, head of covered bond research at Deutsche Bank, said that the Eurosystem probably recognised that the purchase programme was this time around not in a position to have much of an impact on the primary markets, with issuers from core jurisdictions not needing the support and others until recently not appealing sufficiently to investors even with central bank participation.

“In our view the goal to kickstart the primary market for peripheral issuers was misguided when CBPP2 started,” he said.

A syndicate official suggested that the end of CBPP2 would have little impact, but that depending on the market situation at the time and with some issuers prefunding they would be happy to have the support of the programme.

Florian Eichert, senior covered bond analyst at Crédit Agricole, noted that, in contrast to preceding months, activity under CBPP2 in September was heavily focussed on the primary market, where around 90% of purchases (that settled in September) were carried out.

This represents a “drastic change” compared with previous months, he said, and is due to a more sensible approach by the Eurosystem and more active primary markets, as the ECB could have bought more in the secondary market if it had wanted to.

Instead, the approaching expiry of the programme will have driven the focus on the primary market, he suggested.

“The Eurosystem has realised that it does not make much sense to squeeze secondaries to chase a Eu40bn goal that has been long out of sight,” he said. “They have rather resorted to doing what the programme was supposed to do in the first place – help issuers by buying in the primary market.”

Other market participants suggested that questions over whether the programme was used in the right way or not are misguided.

“It was very helpful in getting the market refocused and supported,” said Ted Lord, head of European covered bonds at Barclays. “Whether or not it was fully used or not, or whether the correct covered bonds were bought at the right time is of secondary importance.

“The clear message it sent was the importance of the covered bond market for the health of the European economic recovery. It calmed nerves and got people focussed in the right direction.”