New TLTROs announced by the ECB yesterday (Thursday) will probably reduce covered bond supply, according to analysts, as they will offer some banks cheaper funding than even negative yielding issues. A Eu20bn monthly QE increase is not expected to raise CBPP3 purchases.

The ECB yesterday afternoon announced, among other measures, a new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, to be conducted quarterly from June 2016 to March 2017. The ECB said borrowing conditions in these operations can be as low as the interest rate on the deposit facility, which was yesterday decreased by 10bp to minus 0.40%.

Analysts said the availability of the TLTROs will likely reduce covered bond supply from Eurozone issuers, because of the attractive levels on offer, depending on the exact conditions.

Joost Beaumont, senior fixed income strategist at ABN Amro, noted that the deposit rate of minus 0.4% compares favourably to the yield of minus 0.162% paid by the first negative yielding covered bond, a Eu500m three year Pfandbriefe for Berlin Hyp on Tuesday.

“As of now it is hard to say, and we need to wait for more details, but in general this should decrease gross supply,” said Michael Spies, covered bond and SSA strategist at Citi. “Even if you look at the latest short end deal from Germany, issuers might be able to get more attractive funding levels if they go for the TLTROs.”

However, analysts noted that the interest rates at which banks are able to borrow under the TLTROs will depend on their lending. Banks whose eligible net lending exceeds their lending benchmark will be able to borrow at a rate that can be as low as the rate on the deposit facility at the time of allotment of each operation.

“You would have to look at the lending activities of each bank to see if they will trigger the negative rate on these TLTROs,” said Spies. “Minus 16bp is still more attractive than 0%, the rate that applies if a bank does not increase its lending activity.”

Analysts said the TLTROs might appeal in particular to issuers that fund themselves at higher levels, such as peripheral issuers, reducing the amount of supply from these countries.

However, Spies noted that, as the TLTRO only extends to four years, that issuers may still need to tap other parts of the curve.

“Issuers might still have to be active in the belly of the curve or the longer end to match duration on the asset side,” he said. “So I don’t think issuers will completely switch from covered bonds to the TLTROs.”

The ECB also announced yesterday that:

• the monthly target of its asset purchase programme (APP) will as of 1 April increase from Eu60bn to Eu80bn

• investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be eligible under a new corporate sector purchase programme (CSPP), for which purchases will begin towards the end of the second quarter

• the issuer and issue share limits for securities issued by eligible international organisations and multilateral development banks bought under the public sector purchase programme (PSPP) will be increased to 50%

Analysts said that the higher monthly target is unlikely to translate into increased purchases under the third covered bond purchase programme (CBPP3), expecting that monthly purchases will remain in line with the current Eu7bn-Eu8bn run rate.

“Part of the increase will be met via the buying of investment grade euro-denominated corporate bonds,” said Maureen Schuller, head of financials research at ING, “while the remaining part will probably for a large extent occur via buying in the government bond space.”

Citi’s Spies agreed, although he noted further details are needed on the scope of the CSPP.

“Of course there is still uncertainty about the modalities of the corporate bond buying programme, so it is hard to say how much they will be able to buy,” said Spies.

Spies said that Citi credit analysts expect purchases of Eu5bn-Eu10bn per month under the CSPP, with the rest of the Eu20bn increase made up by PSPP purchases.

“We do not think there will be a step-up in ABSPP or CBPP3,” he said. “This should be a stable takeout of the market.”

However, Spies noted that buying under the corporate bond programme will not begin until towards the end of Q2, whereas the Eu80bn target will apply from next month.

“They might be forced to buy some more covered bonds to make up for the shortfall, but this is not our base case,” said Spies.

Spies said the increase of the share limit means the Eurosystem can buy an extra Eu78bn of supranational bonds.

“That is at least eight months of covered bond purchases at the current run rate,” said Spies. “The potential universe they can buy under PSPP has increased considerably, so we do not think that CBPP3 will be needed to bridge the gap in this period.”

Spies added that although the share of supra purchases within PSPP will be decreased from 12% to 10%, under another of the alterations announced yesterday, the increase of the overall monthly target means that the Eurosystem will buy more supranational bonds overall until the corporate programme starts.

Schuller added that an increase in CBPP3 purchases is unlikely because the ECB’s current covered bond holdings under all three purchase programmes, a total of Eu189bn, already equates to 28% of total euro benchmark covered bond debt outstanding.

“Since September last year secondary purchases have been within a Eu3.2bn to Eu4.5bn range – Eu4.2bn in February,” she said. “Even if secondary buying was to be stepped up a tad, we do not expect it to return easily to the Eu7bn to Eu10bn monthly range seen in the first half of last year considering the large share of covered bonds already held by the central bank.”