A year-end investor survey conducted by Fitch suggests investors are shifting away from covered bonds on the back of CBPP3 and the European Central Banks’ wider asset purchase programme (APP), the rating agency said today (Thursday).

It highlighted that when asked about their investment expectations in the context of CBPP3 and APP, 66% said that they are switching to other asset classes than covered bonds. Furthermore, an aggregate 37% said that they expect their covered bond holdings to decrease somewhat (25%) or significantly (12%) – fewer than expect to maintain the status quo (41%), but more than the 22% who anticipate increasing their covered bond holdings somewhat (with none expecting a significant increase), and in contrast to the 43% who expected to increase their holdings in the corresponding survey a year previously. Fitch also cited a fall in the number of responses to the survey – from 52 to 35 – as reflecting less interest in the asset class among asset managers.

Investors were able to choose more than one response in the question on their investment expectations in the context of ECB QE, and – alongside the 66% switching – 46% said that they are buying covered bonds not eligible for CBPP3, 9% are buying covered bonds with longer maturities, and 20% said that they have not changed their behaviour.

European QE was the second most selected option when respondents were asked about the top three challenges ahead for the covered bond market (60%), behind only decreasing secondary market liquidity (74%).

“The decreasing liquidity also ranked first in the 2014 survey, highlighting respondents’ concern about market behaviour for the period after the end of the APP, including the CBPP3,” said Fitch.

Investors were asked, disregarding QE, to rank factors driving pricing, and the country of issuer came out as most important, followed by covered bonds’ rating and then type of assets, with legal framework fourth.

Fifty-four percent of respondents said they expect the introduction of a harmonised framework to be credit positive, based on harmonisation to the strongest framework, with 26% expecting it to be credit neutral, and 20% credit negative based on harmonisation to the weakest framework.

Transparency stood out among possible areas in which harmonisation would be most useful, with a score of 130, followed by eligibility criteria for assets (102), then legal minimum OC and mandatory liquidity requirements (each 95), and public supervision (88).

The investor survey is the seventh such annual exercise conducted by Fitch. It takes in asset managers mainly based in Europe, but also Asia-Pacific and Latin America, according to the rating agency, which noted that the ECB – the largest investor in covered bonds – did not participate.