CBPP3 buying increased from summer lows in September, with gross purchases exceeding Eu5bn, reflecting an increase in issuance, although analysts noted that purchases remained below the programme average. An extension of QE beyond March 2017 is still expected, despite reports of tapering.

European Central Bank figures released on Tuesday show that settled and outstanding purchases under the third covered bond purchase programme increased Eu430m, from Eu193.874bn to Eu194.304bn in the week to last Friday. (Certain ECB data was released later than usual this week due to a German public holiday on Monday.)

The new total incorporates a quarter-end amortisation adjustment of Eu566m, meaning that gross purchases were Eu996m – with separate portfolio redemption figures released yesterday (Wednesday) afternoon showing that no CBPP3-holdings matured last week. Gross purchases were therefore roughly in line with the Eu968m registered in the previous reporting period.

Some Eu750m of CBPP3-eligible supply settled last week, of which analysts estimated the Eurosystem bought Eu110m-Eu225m – implying average secondary market purchases of Eu155m-Eu178m per day last week. This compares with an average of Eu194m per day in the previous week.

The net increase to the CBPP3 portfolio in September was Eu4.165bn, when the Eu566m quarter-end amortisation adjustment is excluded (portfolio growth was Eu4.731bn including the adjustment).

“After two months with net settlements below Eu4bn, we have thus edged above again, despite a lacklustre primary market,” said Florian Eichert, head of covered bond and SSA research at Crédit Agricole.

When taking into account around Eu300bn in redemptions and the Eu545m quarterly amortisation adjustment, gross purchases were Eu5.01bn.

Analysts noted that the rate of purchases had increased from the previous months, but was still below that of before summer and earlier in the programme.

“Both a pick-up in primary and secondary purchases were responsible for the rise, but neither of the two returned to the monthly levels seen ahead of the summer in May and June,” said Maureen Schuller, head of financials research at ING. “Regarding the primary purchases the explanation is simple: just Eu3.5bn in eligible Eurozone covered bond debt was settled in primary last month, compared to primary settlement numbers of Eu5.5bn and Eu6bn just ahead of the summer.

“Hence, even the somewhat higher take-up of the CBPP3 in the more recent primary deals printed – 33% of the September settlements compared to an average of 27% in the May and June settlements – did not lift the primary number notably.”

She also noted that secondary market purchases in the third quarter had remained below the averages registered in the first half of the year, despite the lack of issuance.

“In the second quarter, gross secondary purchases were higher compared to the first quarter to partly compensate for the slower supply activity and lower primary purchases,” she said. “September supply activity remained very subdued, yet we did not see secondary purchases under CBPP3 return to their Q2 average.

“This supports our expectation that we will continue to see a further gradual slowdown in purchases under the CBPP3, irrespective of whether the term of the total asset purchase programme is going to be extended by half a year or not.”

Analysts expect the pace of CBPP3 purchases to increase, in line with an expected pick-up in issuance, but said the ECB may find it difficult to buy such substantial volumes as at the start of the year, when the run-rate averaged Eu7bn-Eu8bn per month.

Reports emerged this week, citing unnamed ECB sources, suggesting that buying under the asset purchase programme (APP) could be tapered, resulting in an increase in rates, with the 10 year Bund yield rising to almost 0% yesterday.

However, an ECB spokesperson said on Tuesday that the ECB governing council has not discussed reducing its purchases. Analysts also stressed that there is no indication tapering is being considered in the short term, and many market participants still believe that the ECB could in December push back the earliest end-date of APP purchases – currently March 2017.

Analysts at Barclays suggested the ECB’s euro area growth forecasts appear to factor in continued quantitative easing purchases through 2018.

“If the Eurosystem’s December forecast were to remain broadly unchanged (or improve) relative to September’s, we would expect the ECB, in December, to announce not only changes to the technical parameters of QE, but also an extension of QE beyond March 2017,” said the Barclays analysts. “However, the ECB may choose to purchase less than Eu80bn of assets per month if its own macroeconomic outlook remains on track.

The analysts calculated that to achieve its baseline forecast of average inflation at 1.6% in 2018, the ECB would need to maintain an average of about Eu45bn of monthly purchases until end-2018.

“The ECB could choose to start with monthly purchases close to Eu70bn-Eu60bn in 2017 but reduce them gradually towards Eu20bn,” they said.