ECB governing council member Ewald Nowotny yesterday (Monday) suggested the Eurosystem is reaching “limits” in covered bond purchases, but analysts said that while highlighting real issues with CBPP3 the comments simply “state the obvious”, with Nowotny’s unreliable track record also a factor.

Nowotny, governor of the National Bank of Austria (OeNB), was quoted by Bloomberg and Reuters as commenting on the ECB’s third covered bond purchase programme (CBPP3) in a speech on wider policy issues at the Vienna University of Economics & Business yesterday (Monday) afternoon.

“It has reached a point, for example, where banks say, ‘that is profitable, I want to keep it for myself and therefore I won’t sell it’,” Nowotny said of covered bonds. “That is an individual area where we have reached limits.

“In the meantime, we have enough other investment options.”

On the back of Nowotny’s comments, Bernd Volk, head of covered bond and SSA research at Deutsche Bank, said there is a risk that CBPP3 could end earlier than overall ECB QE.

“In fact, CBPP3 started four months earlier than PSPP,” he said. “While we still think that the ECB wants to keep flexible regarding the implementation of QE, a formal end of CBPP3 in March 2017 – or generally earlier than PSPP – should be negative for spreads, particularly given consensus seems to not be expecting it.”

However, Florian Eichert, head of covered bond and SSA research at Crédit Agricole, treated Nowotny’s comments with scepticism, noting that the governing council member caused confusion in 2009 when he incorrectly suggested that buying under the first covered bond purchase programme could be limited to bonds with maturities of up to five years. He further suggested the speech had been misinterpreted.

“Long story short, we are clearly not looking at the CBPP3 closing its doors at this point in our view,” said Eichert. “Nowotny is talking about having reached ‘limits’ not ‘the limit’.”

He said Nowotny’s use of “limits” should be interpreted as meaning that the Eurosystem has reached limits with the programme in some parts of the market, and not as meaning that the Eurosystem has virtually nothing else it can do or buy. Nowotny is hence merely “stating the obvious”, he said, noting that the ECB holds over 30% of the eligible benchmark covered bond market.

“It is the most normal thing in the world that buying additional bonds must have become harder for the CBPP3 by now,” he said.

Many market participants expect the ECB to announce changes to its overall asset purchase programme (APP) in December, anticipating that it will push back the earliest end-date of purchases – currently March 2017 – and/or expand the parameters of its public sector purchase programme.

Despite Nowotny’s comments, Eichert expects CBPP3 to remain active beyond December – albeit with the ECB’s focus being on PSPP and the corporate sector purchase programme – because shutting down one of the four purchase programmes ahead of the others would limit the Eurosystem’s flexibility.

“Nothing will change for the CBPP3 at that meeting – apart from the number of months the CBPP3 will be dragged along with the other programme – while we do expect a number of changes to the PSPP,” said Eichert.

ECB figures released yesterday afternoon show that settled and outstanding purchases under CBPP3 increased Eu649m, from Eu195.841bn to Eu196.490bn in the week to last Friday. This compares with net portfolio growth of Eu916m and gross purchases of around Eu1.16bn in the previous week. The ECB will report portfolio redemption figures this (Tuesday) afternoon, and Crédit Agricole analysts noted that some Eu3.88bn of CBPP3-eligible bonds will mature this week, suggesting that gross purchases could therefore be substantially higher than the net increase.

Joost Beaumont, senior fixed income strategist at ABN Amro, noted that recent ECB figures show that the pace of both primary and secondary market purchases has slowed from pre-summer levels.

“Mr Nowotny now seems to confirm that this is indeed due to a lack of liquidity,” he said “Nevertheless, liquidity is also dependent on primary market activity, so in our view the jury is still out whether the Eurosystem will change its covered bond purchase policy – i.e. start tapering.”

Photo credit: OeNB and L Nieser