Analysts expect euro benchmark covered bond issuance in 2015 to remain at a level similar to that of 2014, with CBPP3 the main driver of new supply and narrowing spreads if the current pace of purchases is maintained, even if sovereign QE is expected to be a new factor.

Estimates from 13 analysts ranged from around Eu104bn to Eu131.5bn for next year. With redemptions remaining high, albeit lower than this year, at around Eu140bn, the market is expected to shrink again in 2015, for the third consecutive year.

Barclays analysts estimate that the global gross supply of euro, US dollar, sterling, Swiss franc, Australian dollar and Canadian dollar-denominated benchmarks will increase from Eu137bn year-to-date to Eu150bn equivalent in 2015, with redemptions rising marginally from Eu170bn equivalent to Eu173bn equivalent.

Regulatory support and good performance are expected to maintain demand for covered bonds, but most analysts are in agreement that the European Central Bank’s third covered bond purchase programme (CBPP3) will dominate the market in 2015.

CBPP3 is expected to support issuance of euro benchmarks, particularly regarding longer maturities and for peripheral banks, by allowing issuers access to achieve funding at attractive costs, while keeping secondary market levels tight.

“We assume that the activities of the ECB will dominate both the primary and the secondary markets in 2015,” said analysts at NordLB. “On the primary market, the purchases by the central bank should have a stabilising effect and ensure that the demand will lead to lower issue spreads than would be possible under non-interventional market conditions.

“The purchases in the CBPP3 should keep secondary market levels at a low level or lead to further narrowing.”

However, some warn that the programme will divide the market while crowding out investors, as covered bond valuations continue to look expensive when compared to neighbouring asset classes, with the Eurosystem central banks taking increasingly large shares in new issues.

Analysts at HSBC noted that before the start of CBPP3, central banks and official institutions were allocated on average 10.5% of all Eurozone benchmark covered bonds, but that during the programme this jumped to 42%.

“As appealing as it might be from an issuer’s perspective to allocate high percentages to the Eurosystem to ensure the lowest possible new issue spread, it is important to focus on the long-term real-money investor basis as well,” said the analysts. “Many investors who were not able to buy covered bonds in the secondary market over the last two years relied on the primary market to acquire the desired amount of covered bonds.

“However, the high allocation share of the central bank community in the recent new issues means that traditional investors were crowded out.”

Even with markets already starting to price in an anticipated QE programme from the ECB, covered bonds are likely to underperform euro-area sovereign bonds strongly in the short term, Citi analysts said.

“One thing is quite clear – the covered bond market has rarely been less attractive: on absolute yield levels, covered bonds have never been richer,” they said. “Hence, it is unsurprising that investors are increasingly looking elsewhere for opportunities.”

However, many analysts doubt that the pace of CBPP3 buying will be maintained through the year, suggesting the extent of its impact on the market may depend on whether the ECB embarks on a sovereign QE programme in 2015. Such a shift in focus is expected.

“It would certainly be easy for the ECB to buy up large volumes of government bonds – on both the primary and secondary markets,” said Alfred Anner, senior covered bond analyst at BayernLB, “and it would be able to meet its goal of expanding its balance sheet more easily and quickly than by way of the tedious purchase of covered bonds, which is made even more so by the fact that ECB purchases are contributing to a crowding out of private investors.”

Heiko Langer, senior covered bond analyst at BNP Paribas, added that European sovereign bonds would catch up with covered bonds in this scenario.

“If purchases of government bonds were to be announced by the ECB, which our economists see as a likely scenario for the coming months, we expect to see a reversal of the outperformance that covered bonds have shown against government bonds in previous months,” Langer said.

“We would not expect an active slowdown or a complete halt in covered bond purchase activity under CBPP3. Thus, we would expect the overall technical support for covered bonds in a QE scenario to remain largely intact, which should support covered bond swap spreads while covered bonds are likely to cheapen vs. government bonds.”

The highest euro benchmark issuance estimate for 2015 is NordLB’s, at Eu131.5bn, compared with Eu104bn, the lowest, from LBBW. NordLB analysts see low spreads encouraging issuers to opt for covered bonds over alternatives, while in contrast LBBW analysts see ECB buying putting pressure on the demand side.