An anticipated cut to the ECB’s deposit rate will pull covered bond yields at the shorter end of the curve further into negative territory, according to market participants, forcing issuers and investors into the longer end. Meanwhile, CBPP3 portfolio growth in November represented a low.

The European Central Bank is expected on Thursday to announce a cut to deposit rate, which is at minus 20bp, alongside an expansion of its asset purchase programme (APP) after the conclusion of a meeting of the governing council.

Market participants, expecting a deposit rate cut of 10bp to 20bp, said yields across asset classes are likely to fall.

“If, as expected, the ECB announces an extension to quantitative easing and further interest rate cuts at its meeting on Thursday, Europe’s fastest growing asset class – negative yielding debt – will receive another boost,” said David Riley, head of credit strategy at BlueBay Asset Management.

He noted that since the ECB cut its deposit rate to minus 20bp in September 2014, negative yielding debt has risen from around Eu500bn to more than Eu2.7tr, including almost 40% of European government bonds.

“As the ECB – and other central banks in Europe – challenge the notion of a ‘zero lower bound’ for interest rates and extends its bond buying programme, it is likely to induce a hunt for yield,” he added.

Joost Beaumont, senior fixed income strategist at ABN Amro, said the anticipated rate cut has already had an impact on government bond yields, with a 10bp cut priced in, although a 20bp cut is not fully priced in, he added.

“It depends of course on what the ECB announces and on any changes to the QE programme,” he said, “but logically, it’s likely that covered bond yields will also become more negative at the shorter end of the curve.”

Beaumont said this could mean that covered bond investors move further up the curve, noting that at the start of the year, when rates were low, longer-dated issuance was more common.

“This means that investors still get some yield and issuers lock in low yields for longer, so it is mutually beneficial,” he said. “But the rate cut could also be that some investors move into other asset classes to look for yield.”

A syndicate official noted that the three year swap rate was around 2bp when the last three year euro benchmark covered bond was priced, a Eu1.5bn issue for SpareBank 1 Boligkreditt on 5 November, and was today (Tuesday) at minus 0.06bp.

“With the expected deposit rate cut, we will clearly see a move further into negative territory,” he said. “That will probably mean that the three year option disappears, and I certainly wouldn’t be recommending that issuers do three year deals in the negative territory.

“But then, to be fair, we’ve hardly seen any three year deals anyway.”

The syndicate official said that issuance in five years, which has been a favoured maturity, could also become less frequent, noting that the five year swap rates is at 17bp.

“Overall it shouldn’t impact the European issuers and the guys that are happy to take long dated funding,” he said. “But given the average duration is around seven years, it is going to make it tricky for some issuers, given that they won’t be able to access the short end.”

Figures released yesterday (Monday) afternoon by the ECB show that settled and outstanding purchases under the third covered bond purchase programme increased Eu2.127bn to Eu137.821bn in the week to last Friday. This compares with portfolio growth of Eu1.559bn in the previous reporting period.

Analysts variously estimated that the Eurosystem bought Eu1.5bn-Eu1.9bn of last week’s settled primary market issuance, implying average daily secondary market purchases of Eu49m-Eu125m, one of the lowest secondary figures to date.

They further noted that, excluding any purchases settled yesterday, the ECB’s CBPP3 portfolio grew by Eu6.677bn in November, the lowest growth across a whole month since the programme began.

They said that, in contrast, there had been evidence of pre-winter frontloading in the public sector purchase programme (PSPP), after the portfolio grew Eu13.746bn in the week to last Friday. Analysts said this increase is the third highest under the programme.