CBPP3 set for litmus test after rebound, QE extension ‘likely’
Expected changes to ECB QE will have little direct impact on covered bonds, according to analysts, although they are expected to be captured in a pushback of APP’s earliest end-date. September is considered a litmus test for CBPP3 after it last week increased by its highest amount since June.
Market participants disagree as to whether or not European Central Bank president Mario Draghi will this (Thursday) afternoon announce an extension of or modifications to the quantitative easing programme, following a monetary policy meeting of the central bank’s governing council.
Many analysts expect the ECB to move back the earliest end-date of the asset purchase programme (APP) from March 2017, although some suggest that such a move will more likely be announced in December.
If the ECB does extend its APP programme, it will also need to change the parameters of its purchase programmes to widen the universe of eligible bonds, analysts have said, with the ECB’s options including:
- The removal or lowering of the floor that currently restricts PSPP buying to bonds that have a yield above its deposit facility rate, which is currently minus 40bp;
- The removal of the capital key as a limiting factor for the asset purchase programme for any given sovereign;
- An increase of the issue share and issuer limits for bonds under the PSPP from the current 33%.
The direct effects on the covered bond market of any such changes are expected to be limited.
“Allowing purchases below the deposit rate could help to boost the PSPP, for example, but in the covered bond segment this yield threshold has not been a real bottleneck so far,” said Ted Packmohr, head of financials and covered bond research at Commerzbank. “The buying limit per ISIN is also quite generous already for the CBPP3 at 70%.”
He said the detachment of government bond purchases from the capital key would also have only a limited indirect impact on covered bond spreads.
Packmohr expects the ECB will probably announce a six month pushback to the earliest possible end-date of the asset purchase programme (APP), to at least September 2017.
“We do not believe that the CBPP3 will be discontinued independently before the end of QE as a whole, as this would give the wrong signal from the ECB’s perspective,” said Packmohr. “Investors who had hoped for an end to covered bond purchases soon are therefore likely to be disappointed.”
However, he said that it could prove difficult for the ECB to maintain the pace of purchases from the first half of the year, of around Eu7bn-Eu8bn per month, with issuance expected to be more limited in the second half.
“While the recently published August data was not that meaningful in this respect given the summer break, September could be an important litmus test here,” he said. “That said, we believe the ECB’s purchases will continue near the market’s capacity for the time being.”
ECB figures released on Monday show that settled and outstanding purchases under the third covered bond purchase programme increased Eu1.526bn, from Eu189.209bn to Eu190.735, in the week to last Friday. Portfolio redemption figures released on Tuesday afternoon show that no CBPP3-holdings matured last week.
The latest week’s figure compares with gross purchases of Eu849m in the previous reporting period, when no CBPP3-holdings matured.
Analysts noted the week’s increase is the biggest in the CBPP3 portfolio since the week commencing 20 June, with purchases since then having fallen as issuance dried up and activity slowed over the summer period, as had been expected.
“It is the first time in seven weeks that purchases exceeded the Eu1bn mark,” added Emanuel Teuber, credit analyst at UniCredit, “and the reason is that most of the new deals we saw two weeks ago were settled last week.”
Some Eu2.75bn CBPP3-eligible supply settled last week, of which analysts estimated that the Eurosystem purchased around Eu900m-Eu1bn.
This implies average secondary market purchases of around Eu112m-Eu132m per day – the lowest daily secondary market purchases since November 2015 when redemptions are taken into account, according to figures compiled by Crédit Agricole analysts. In the previous reporting period, when no benchmarks settled, secondary market purchases averaged Eu169.8m per day.
Despite the increase in settlements last week, last month’s gross purchases of around Eu2.975bn are one of the lowest monthly figures under the programme, and compared with gross purchases of around Eu4.3bn in July. However, net CBPP3 portfolio growth in August, of Eu3.504bn, was only the second lowest of any month since the programme began, with a record low of Eu3.258bn having been set in the previous month when there were higher redemptions.