CBPP3 could play a role in any reopening of the covered bond market in volatile conditions, according to some bankers, but they added that concerns remain over its negative effects, as figures yesterday showed the pace of Eurosystem buying increased last week.

Figures released by the European Central Bank yesterday show that total purchases settled and outstanding under the third covered bond purchase programme rose Eu2.454bn to Eu94.567bn last week. This compares with a Eu2.203bn increase in the previous reporting period.

A Eu500m HSH Nordbank seven year deal and a Eu500m 10 year CFF issue that are CBPP3-eligible settled last week. Analysts estimated the Eurosystem bought some Eu300m to Eu320m of the deals, and said the pace of secondary purchases had increased after slowing in the previous reporting period.

The release of the latest CBPP3 figures comes as seen spreads have widened considerably in many markets, although market participants have noted that covered bonds had remained relatively resilient.

Many market participants have since CBPP3’s announcement expressed concern over its long term effects on the market, but some bankers have acknowledged that the current widening would likely be more pronounced if it were not for the programme’s support.

“CBPP3 has helped to keep the spreads at levels where they would not be if it was not for their buying,” said Bernd Volk, head of covered bond and agency research at Deutsche Bank.

“That is why the market is not so reactive – the volume in CBPP3 buying is significantly big compared to the total market.”

Ralf Grossman, head of covered bond origination at Société Générale, agreed.

“The programme is helping spreads stay tighter, so you can argue that is a positive from an issuer’s point of view,” he said. “At the moment, I think it is OK that we have the CBPP3 around.”

Grossman added that, although the aid of CBPP3 has not completely diminished execution risk in recent weeks, the presence of the Eurosystem bid would support the eventual reopening of the euro covered bond market if issuers attempt to launch new deals while difficult conditions prevail.

“It will definitely help with the market reopening,” he said. “Of course part of a deal will still have to be sold to private investors, but issuers know they can count on a significant CBPP3 order, and that will give them some room for flexibility in launching new issues.”

Citing the significant premiums that issuers would likely have to pay in current conditions, Volk added that deals would probably still need the support of the Eurosystem.

“If there are new issues, the CBPP3 will help to get them done,” he said.

However, a syndicate official argued CBPP3’s main impact was a distortion of the market, and said he believed covered bond spreads were only being prevented from widening further by a lack of sellers.

“Personally, I think the only reason this market is not trading wider is that secondary turnover is a shadow of its former self,” he said. “The absence of trading has done much more for the stabilisation of spreads than central banks.”

The syndicate official also said it would have a negative impact on the market if issuers were to attempt a reopening on the back of CBPP3 support.

“It could be tempting for an issuer to play the ECB card, and sell 40% of their deal in one shot, but we all know a deal consists of 100%,” he said. “I would hope all responsible issuers would not act like this and use CBPP3 to push a deal over the line, as that is the last thing this market needs.”

“CBPP3 is still more of a curse than a blessing.”

Grossman also expressed concern about the programme’s future impact on liquidity.

“In the end, the central banks will have around 40% of the benchmark covered bond market in their portfolios, and we know they are buy-and-hold investors,” he said. “Liquidity is already down and having such a large volume in the CBPP3 portfolio will not help it come back.”

“So with CBPP3, it is a mixed bag.”