A lack of detail and delayed start date for CBPP3 from the ECB yesterday (Thursday) left many market participants still trying to get their heads around the project, with one saying it could hold up near term issuance and analysts disagreeing on how loose the criteria are.

The European Central Bank’s third covered bond purchase programme (CBPP3) will begin in the second half of October, the central bank said in a statement yesterday – or, in the words of ECB president Mario Draghi speaking at a post-Governing Council meeting press conference, in “mid-October” – and will last for at least two years – in parallel with an asset-backed securities purchase programme (ABSPP) that will start before year-end.

A syndicate manager said that many market participants had been expecting buying to start immediately after the announcements and that the delayed start could cause issuers to rethink launch dates of deals and potentially dampen supply at the start of the programme. He said that some issuers, including those how have roadshowed recently, such as Belfius Bank, had been expecting buying to begin now and support issuance from next week onwards, but that they could – again – adopt a wait-and-see approach. He also noted that many banks will be entering blackout towards the end of October and could therefore be prevented from taking advantage of any buoyancy the start of CBPP3 buying provides.

“I’m not really sure what their reason for waiting is,” said the syndicate official. “I think they were maybe not prepared.

“The markets puked afterwards as Draghi didn’t seem very certain which way he’s leaning.”

Uncertainty also persisted today (Friday) over the likely magnitude of the ECB’s activity as no figure was given for either CBPP3 or CBPP3 combined with the ABS programme. Draghi merely reiterated the central bank’s aim of restoring its balance sheet to early 2012 levels through the programmes and TLTROs. This has been taken to imply a figure in the region of Eu1tr, although despite efforts to pin Draghi down on this in the Q&A yesterday (Thursday) afternoon he refused to be drawn on an exact number.

In the absence of a clear figure market participants were still playing down the amounts that the ECB will buy relative to the Eu1tr number and a Eu500bn combined covered bond and ABS total that was widely discussed in the wake of the initial announcement a month ago.

“Not much has really changed,” said one market participant. “Their ambition seems to be to grow the balance sheet by Eu1tr, but we still think it is very unlikely they can achieve too much unless they really go all out – and then we can basically just walk out from here and turn out the lights.”

The low expectations persist in spite of the ECB having in key areas loosened eligibility criteria relative to its first two covered bond purchase programmes (CBPP1 and CBPP2). Joost Beaumont, fixed income strategies at ABN Amro, for example, highlighted that size and maturity conditions have been scrapped, and that fully retained covered bonds will also be eligible.

“However, we stick to the view that will be difficult for the ECB to buy a significant amount of covered bonds in the coming two years, given that there is hardly any paper to find due to negative net supply,” he said. “The fact that the ECB did not communicate a specific programme size strengthens our view.”

(See yesterday’s article for further details of the announced criteria.)

Several observers noted that a UCITS eligibility criterion that applied to the previous programmes (with “or similar safeguards” added in the case of CBPP2) has gone. However, some covered bond analysts have interpreted a reference to existing monetary policy operations criteria in the ECB’s CBPP3 technical annex as meaning that covered bonds have to be CRR-compliant, which would be a narrower criterion than previously. The clause in question is that covered bonds must “be eligible for monetary policy operations as defined in Guideline ECB/2011/14 as amended and, in addition, fulfil the conditions for their acceptance as own-used collateral as laid out in Section 6.2.3.2 (fifth paragraph, lit. (b)) of the same Guideline”.

“By linking the eligibility to the conditions needed to use retained covered bonds as repo collateral (own-use covered bonds), covered bonds have to be CRR-compliant,” said Florian Eichert, senior covered bond analyst at Crédit Agricole.

He said that this means CBPP3 is in this respect stricter than the previous programmes, and will also exclude SME covered bonds, for example, even if these are legislative-based.

Yesterday’s announcement nevertheless provided strongest support for peripheral covered bonds from the likes of Italy and Spain, according to market participants. Multi-cédulas were explicitly and helpfully referred to in the technical annex and were said to be among the best performers in the wake of the announcement, tightening 12bp-18bp on the day, according to one market participant.

More general spread expectations were subdued, if in the same direction.

“All in all we do not expect the press release to trigger another spread tightening rally throughout the covered bonds market since we believe the market priced in CBPP3 in the first few days after the announcement,” said Günther Scheppler, covered bond analyst at DZ Bank. “Note also that average market spreads are now slowly approaching a level that would just not support a substantial market-wide rally.

“Our forecast sees the risk premiums of core-euro-zone covered bank bonds either tightening in a little further at best or even flat-lining in the coming weeks.”

Looking at the longer term and broader context, several market participants said that yesterday’s overall announcement and the market’s reaction make a touted move to purchases of euro-zone government bonds more likely.

“It was a smart move from Draghi, not announcing a volume,” said Matthias Melms, covered bond analyst at NordLB, “so he still has all options on the table and can announce QE later next year when he can prove that there will not be enough volume available from TLTRO, ABSPP and CBPP to extend the balance sheet between Eu700bn and Eu1tr.”