Reinvestment of principal payments in the ECB’s APP portfolio could effectively amount to a “CBPP4”, with covered bond purchases of as much as Eu40bn per year after QE’s end-date, according to Crédit Agricole analysts. CBPP3 portfolio growth meanwhile slowed last week.

In December, European Central Bank president Mario Draghi announced that the ECB will reinvest the principal payments on securities purchased under the asset purchase programme (APP) as they mature “for as long as necessary”. He described this move as a “quite important measure” and said it would mean that abundant liquidity conditions continue for a “long, long time”.

However, in the aftermath of the announcement, which came in at amid a package of measures that disappointed the market, the impact of the move was played down.

But according to Florian Eichert, head of covered bond and SSA research at Crédit Agricole, this reinvestment could mean Eu40bn of covered bond purchases per year from 2019 onwards, after the APP’s earliest end-date of March 2017.

Eichert noted that the technical details of the reinvestment programme are yet to be released, but said he believes it is a realistic assumption that maturing bonds would be reinvested in similar products and sectors.

“Should this assumption hold, we would be talking about reinvestment volumes that can certainly be called a separate purchase programme in their own right,” he said. “Rather than facing an early CBPP3 exit, we would ultimately be looking at some sort of a ‘CBPP4’, which could be active with Eu30bn-Eu40bn in annual purchases for however long the reinvestment scheme is run by the Eurosystem.

“While the way the Eurosystem invests money is likely to change somewhat compared to the current approach of the CBPP3, the volumes invested would certainly be big enough to have a noticeable stabilising impact on the market.”

Crédit Agricole analysts estimated the Eurosystem’s reinvestment needs and the maturity profile of the CBPP3 portfolio by simulating the portfolio’s current holdings, as well as its potential holdings by March 2017 and September 2017, and assuming a monthly run rate for CBPP3 of Eu7.5bn going forward.

Based only on the CBPP3 holdings as of the end of January 2016, Eichert said the Eurosystem would be faced with maturing principal payments starting from a very low base in 2016, but said these would increase to around Eu13bn in 2017 and Eu20bn-Eu25bn in 2018, 2019 and 2020 – larger volumes than were bought under CBPP2, he noted.

Reinvestments up until 2019 would mostly come from secondary market purchases, Eichert said, and would therefore be scattered throughout the year. But should the reinvestment programme last beyond 2020, larger maturities of bonds bought on the primary market would translate into larger reinvestments, he added.

If CBPP3 continues to March 2017 or beyond the current earliest end-date to September 2017, the maturities and thus reinvestment volumes would be substantially higher, according to Eichert – starting at Eu20bn per year in 2017 and rising to almost Eu35bn by 2020, should the programme end in March 2017, and starting at Eu23bn in 2017 and rising to almost Eu40bn by 2020, should the programme end in September 2017.

Projected maturity profile of CBPP3: March 2017 end-date (EUR m)

Source: Eurosystem, Bloomberg, Crédit Agricole CIB

“The amount of money that would be reinvested under those two scenarios would certainly be much lower than the current volumes and also lower than the volumes purchased under the CBPP1,” added Eichert. “However, we are still talking about very respectable amounts that are clearly big enough to have a market impact.”

Eichert said that, with the possible exceptions of Italy, Spain and Portugal – where sovereign debt-tightening is needed for covered bonds to be deemed attractive again – covered bond levels therefore look attractive overall.

“So,” he added, “for all of those who believe current spread valuations are fair overall but are afraid of a combination of poor liquidity and an early exit from the CBPP3, we can only say the following: as little as we like it, the Eurosystem will stick around for quite some time and could even be actively buying in substantial volumes after the official end of QE.”

ECB figures released yesterday (Monday) afternoon showed settled and outstanding purchases under the third covered bond purchase programme increasing Eu1.031bn, from Eu155.131bn to Eu156.162bn, in the week to last Friday. This was down from Eu2.229bn in the previous reporting period and a similar figure the week before that, as primary market activity slowed.

Only one CBPP3-eligible benchmark settled last week, a Eu500m LBBW issue, of which analysts estimate the Eurosystem bought Eu120m-Eu125m. Assuming no maturities, this implies average daily secondary market purchases of around Eu180m, in line with analysts’ estimates of around Eu175m in the previous reporting period.

“The weekly increase in the Eurosystem’s covered bond of Eu1bn was in line with our estimate and meant that the central bank kept its purchase policy unchanged,” said Joost Beaumont, senior fixed income strategist at ABN Amro. “Indeed, it did not step up its purchases in the secondary market despite that only one deal settled in the primary market.”

The public sector purchase programme (PSPP) portfolio grew Eu12.570bn to Eu582.616bn last week, compared with an increase of Eu12.718bn in the previous week.