Take-up of only around Eu130bn at the second ECB targeted longer term refinancing operation (TLTRO) yesterday (Thursday), compounded by almost Eu40bn of LTRO repayments announced this morning, has solidified expectations that sovereign QE will be unveiled in January.

The Eu130bn figure announced by the European Central Bank was below consensus forecasts of around Eu150bn, but higher than the Eu83bn taken up at the first TLTRO in September.

“Overall, we would interpret the December TLTRO take-up as big enough not to be significantly disappointing but also low enough to keep further balance sheet expansion measures firmly on the table for the January ECB meeting,” said Barclays rates analyst Cagdas Aksu.

The TLTRO figures combined with CBPP3 and ABSPP totals are being compared against the stated Eu1tr balance sheet intention of the ECB by market participants judging the likelihood of the central bank’s extraordinary monetary policy measure being expanded to take in the contentious prospect of sovereign QE.

“Overall, we doubt that that the ultimate goal of the ECB to increase its balance sheet by around Eu1tr can be achieved with TLTROs and ABS covered bond purchases alone,” said Michael Spies, covered bond and SSA strategist at Citi.

Indeed some market participants who had been more doubtful about sovereign QE have been coming around to the idea that it will happen.

“It now looks close to impossible to achieve anywhere near a trillion euro balance sheet expansion with its existing measures,” said Joost Beaumont, senior fixed income strategist at ABN Amro. “It will need to broaden asset purchases and sovereign bonds will need to be part of the mix.

“We previously thought that agency debt and corporate bonds would suffice.”

Should a sovereign QE programme be launched, covered bonds are expected to underperform – even if government bond buying does not begin until April, according to some observers, with controversial and technical aspects needing to be worked out beforehand.

“We expect covered bonds to underperform euro-area sovereign bond markets strongly in the short term despite the fact that markets already start to price in a QE programme,” said Spies. “Hence, we recommend switching from covered bond markets to sovereign bond markets.

“The spread move between such asset classes will probably be the most pronounced price correction and put covered bonds back to a level playing field in term of valuation and ECB [CBPP3] backing.”

A covered bond syndicate official noted today that spreads have already backed up 3bp-6bp this week, bringing covered bonds well off the lows witnessed at the height of CBPP3’s impact in early November, when spreads were at their tightest.