The Eurosystem found buying of covered bonds for CBPP3 “more challenging” in the run-up to the European Central Bank’s July governing council meeting, according to minutes released by the ECB yesterday (Thursday), although its purchase rate has since rebounded from recent lows.

According to the minutes of the 15-16 July meeting, ECB executive board member Benoît Cœuré (pictured) discussed the status of the third covered bond purchase programme (CBPP3) when reviewing recent financial market developments. He noted that CBPP3 buying totalled Eu10.2bn in June.

“Portfolio managers had reported that purchases of eligible covered bonds were becoming more challenging,” the minutes report Cœuré as having said, with several factors cited as having contributed to the situation. “First, euro area covered bond supply had slowed since the end of May and had remained quite low compared with previous years. Second, the period of volatility had reinforced the status of covered bonds as a safe-haven instrument, which was also consistent with their favourable regulatory treatment, including the no bail-in treatment under the Bank Recovery & Resolution Directive (BRRD).

“Covered bonds had thus benefitted from the flight to quality and this had possibly deterred some investors from reducing their covered bond positions in favour of other assets with better relative value.”

In the week commencing 29 June settled and outstanding purchases under CBPP3 went up by one of the smallest weekly increases, less than Eu1.5bn, and this came after several weeks in which the rate of purchases had fallen. This was also contrary to expectations of possibly increased buying after Cœuré himself had said in mid-May that expanded asset purchase programme (EAPP) buying would be front-loaded ahead of continental Europe’s summer holiday period.

The pace of buying has, however, since rebounded, with an increase of Eu2.642bn in the week to last Friday coming after a Eu2.317bn the previous week and being close to the long term average weekly rate.

According to the ECB minutes, there was broad agreement among members of the governing council that cross-checking the assessment of economic and monetary developments did not give reason to reconsider the current monetary policy stance or to materially change the modalities of the APP.

Ulrich Bindseil, director general, market operations, ECB, has nevertheless said that the ECB has the flexibility to use the public sector purchase programme (PSPP) pillar of the EAPP to reach its target volume of Eu60bn per month if necessary if it cannot achieve its ambitions for purchases of covered bond and asset-backed securities.