An expected expansion of ECB QE in March will not lead to increased covered bond purchases, according to some analysts, but one suggested CBPP3 buying could be spread over a longer period. The CBPP3 portfolio grew Eu2.851bn last week, the largest increase since October.

European Central Bank president Mario Draghi last Thursday said the central bank’s governing council will review and possibly reconsider its monetary policy stance at its next meeting, raising expectations of additional quantitative easing and/or a cut to the ECB’s deposit rate in March.

The ECB on 3 December announced that the earliest end-date of its asset purchase programme (APP) was being pushed back from September 2016 to March 2017 and added local and regional bonds to the list of PSPP-eligible assets, while an increase to the programme’s targeted monthly volume and a cut in the deposit rate had been expected.

Michael Spies, covered bond and SSA strategist at Citi, noted that Citi economists expect the monthly APP target to be increased to Eu75bn in March.

“I do not expect this to be proportionally distributed over all eligible assets, however,” said Spies. “I think rather this expansion will be mainly recorded in PSPP and not in the same fashion in CBPP3.”

He expects CBPP3 purchases to gradually fall this year to below Eu8bn per month, and said that the Eurosystem should have enough scope to increase its purchases under PSPP.

“Given the expansion into other markets like the sub-sovereign market recently, they can increase PSPP purchases easily, and I think as long as we have 10 year Bund yields above 0% and the deposit rate in very negative territory, the ECB should not run out of PSPP-eligible bonds in the near-to-medium term,” said Spies. “That, I think, is more a question for 2018.”

Joost Beaumont, senior fixed income strategist at ABN Amro, agreed that CBPP3 buying is unlikely to increase. He added that ABN Amro economists’ base case is that the ECB increases the monthly pace of asset purchases by Eu10bn, with the focus on PSPP rather than CBPP3, while also cutting the deposit rate by 10bp.

“I think that the ECB will keep its current policy roughly unchanged – so keeping its focus on the primary market and buying on average 30%-40% of new deals, while buying roughly Eu200m a day in the secondary market,” he said. “This implies that if the PSPP were to be increased, only the relative size of CBPP3 in the total programme would be reduced.”

After Draghi’s speech, Barclays economists on Thursday also said they believe an expansion or adjustment of the APP could be announced in March, depending on developments, after having previously said that the ECB was likely to wait until June.

“QE extension and/or expansion would require some technical adjustment of its parameters that President Draghi did not exclude during the press confidence, including a deviation from the capital key rules,” said Philippe Gudin, chief European economist at Barclays. “We also believe that the pool of eligible assets is likely to be expanded further, possibly to encompass new asset classes such as investment grade corporate bonds, although the question of credit risk management would have to be addressed.”

However, Jussi Harju, covered bond analyst at Barclays, added that the ECB’s decision to extend the APP to at least March 2017 reduced the maximum amount of monthly purchases the current list of eligible agencies can accommodate, as purchases will now be split across more months. He said this increases the Eurosystem’s reliance on primary supply to replenish the stock of outstanding bonds it then can buy in the secondary market, meaning in turn that APP’s agency segment has less room than before to accommodate any increases in monthly purchases.

“All told, even if we believe that the ECB should scale down its covered bond purchases, the lack of other assets that could be bought to fill the gap, let alone the insufficient amount of supranational bonds to buy, might force the ECB to continue its covered bond purchases further or to expand eligible assets to corporate bonds,” said Harju.

“However, there are some tentative signs that through a shift from secondary to primary markets, it aims to prevent a further deterioration of market liquidity.”

ECB figures released yesterday (Monday) afternoon show that settled and outstanding purchases under CBPP3 grew from Eu146.006bn to Eu148.857bn in the week to last Friday.

This represents the largest week-on-week growth in the portfolio since the last week of October, when settled and outstanding purchases rose Eu3.011bn, and compares with portfolio growth of Eu2.075bn in the previous reporting period.

Eight CBPP3-eligible deals settled last week, comprising Eu5.25bn of supply, of which analysts estimate that the Eurosystem bought around Eu2bn. Assuming no redemptions, this implies the ECB bought on average around Eu165m per day on the secondary market. Analysts noted that the secondary market purchases had therefore increased compared with the average of around Eu110m in the previous week.

However, Maureen Schuller, head of financials research at ING, noted that the pace of secondary purchases in January has slowed versus December. She said that the buying trend in the first three weeks of the year points at weekly secondary market purchases of around Eu586m.

“This is indicative of a further slowdown in secondary purchases in January compared to the Eu3.25bn bought in the secondary market in December,” said Schuller.