The covered bond market offers greater opportunities as increased QE makes relative value in the market more interesting, according to two large investors, while bankers said CBPP3 purchases could fall later this year despite the ECB’s higher monthly APP target. The CBPP3 portfolio increased Eu2.423bn last week.

Starting from 1 April, the monthly target of the ECB’s asset purchase programme (APP) increased from Eu60bn to Eu80bn.

Figures released yesterday (Monday) afternoon show that settled and outstanding purchases under the third covered bond purchase programme increased from Eu166.832bn to Eu169.255bn in the week to last Friday. Analysts noted that this Eu2.423bn increase was one of the largest in recent weeks, compared with an increase of Eu989m in the previous reporting period.

However, noting that CBPP3 settlements total Eu3.616bn so far this month, some analysts said the Eurosystem still seems to be on target to maintain its recent pace of Eu7bn-Eu8bn per month.

“Hence, particularly given that the ECB can also purchase retained covered bonds, clear conclusions remain challenging,” said Bernd Volk, head of covered bond and agency research at Deutsche Bank.

Two CBPP3-eligible deals settled last week, totalling Eu3.5bn, of which analysts estimated the Eurosystem purchased Eu1bn-Eu1.2bn. Assuming no redemptions, this implies average daily secondary market purchases of Eu260m-Eu300m.

Analysts noted that this represented an increase from recent weeks, such as around Eu175m in the previous reporting period, but some noted that the latest figure was not significantly higher than purchases in some weeks in March – before the increase to the APP – when daily secondary market purchases at times exceeded Eu240m.

Some market participants had said CBPP3 purchases could increase slightly from the current Eu7bn-Eu8bn monthly run-rate because of the higher monthly APP target, to make up for a shortfall before buying begins under a new corporate sector purchase programme (CSPP) towards the end of the second quarter, but others said the Eurosystem’s public sector purchase programme (PSPP) will fill the gap.

Speaking at a European Covered Bond Council plenary in Copenhagen on Thursday, a banker said he expects Eu10bn-Eu15bn of the extra Eu20bn to be purchased under PSPP and Eu5bn-Eu10bn under CSPP.

“What we don’t expect is that we will see an increase of covered bond purchases,” he said.

The banker said the pace of CBPP3 buying could increase slightly in April and May to make up for the shortfall until CSPP buying begins towards the end of the second quarter.

“But as soon as the corporate purchases kick in,” he added, “we expect that the ECB will fall back to buying something like Eu7bn-Eu8bn per month in covered bonds, and maybe going forward – depending on primary markets – it could be even less than that figure.”

Another banker added that it would have been difficult for the Eurosystem to increase the primary market purchases in recent weeks. He noted that since the ECB announced the expansion of the APP and a new series of four targeted longer-term refinancing operations (TLTRO II) on 10 March, new issue premiums have fallen, with many deals now pricing almost flat to issuers’ secondary curves.

“This is a sign that a lot of real money investors have returned, that there’s a risk-on mode and a happiness to own bonds,” he said. “Because of that, the share of the ECB in allocations is definitely smaller, so even if they intend to increase their share in the covered bond space, they would struggle to.”

Frank Will, global head of covered bond research at HSBC and chairman of the ECBC EU legislation working group, suggested that CBPP3 purchases could decrease later this year because of a fall in issuance, following heavy supply in the first quarter of 2016 and with the availability of the new TLTROs also having the potential to curb issuance.

“If you talk to some of the central banks, many questions from their side are about the expected supply for the rest of the year and the lack of liquidity in the secondary market,” he said. “That makes you feel that at least some of them are getting nervous that they’re not going to reach the targeted amount.”

Daniel Loughney, portfolio manager at AllianceBernstein, said that UK investors had taken a step back from the covered bond market in the second half of last year because of the tight spread levels.

“But there’s been a lot of things that’ve happened since,” he said. “The QE programme is going steady, the market got a bit livelier than has been case – primarily because of supply – and now there is the expanded QE, which is going to make relative value in the space more interesting.”

Loughney said UK investors are now more active in the covered bond space than in the second half of 2015 and are also switching between jurisdictions more actively than in the past, in order to find value. He noted that in the first quarter AllianceBernstein had been active in French, Australian and Swedish paper.

“UK investors are certainly less pessimistic than they were last year,” he added.

Henrik Stille, portfolio manager at Nordea Asset Management, said he is also seeing more opportunities in the market, adding that they are particularly useful in building large mixed asset portfolios.

“Covered bonds play a more and more important role as the asset class where we allocate our fixed income exposure,” he said.

Stille said this partly because there is generally less volatility in covered bonds than in government bonds, and because the differences in spreads between jurisdictions is also much smaller than in government bonds.

“It’s very dynamic,” he added. “We are very active in moving exposure around.”