Euro benchmark covered bond issuance is set to fall next year, according to early investor and analyst expectations that put supply at Eu120bn-Eu130bn, with constraining factors such as TLTROs, lower redemptions and political instability trumping the asset class’s expansion and CBPP3’s direction.

As market participants begin to look to next year, analysts have begun to produce estimates for 2017’s euro benchmark supply, and those first to nail their colours to the mast see supply in a similar range. Analysts at Commerzbank expect less than Eu120bn, for example, their counterparts at ING Eu120bn, those at UniCredit Eu125bn, and Crédit Agricole’s around Eu125bn-130bn.

A Société Générale survey of 50 European covered bond investors published today (Thursday) found that 44% expect supply to remain stable next year, while another 44% expect lower supply than 2016. A NordLB survey also released today of more than 50 market participants, including investors, found that around 50% expect Eu120bn-Eu130bn next year.

Such issuance volumes could represent a fall from this year, as some Eu123.7bn of euro benchmark covered bonds have been issued so far in 2016.

“Ongoing low demand for private placements, the continuation of the CBPP3 and several potential new entrants are among the factors arguing for lively issuance activity in the euro benchmark segment next year,” said Commerzbank’s analyst. “On the other hand, low yields, the TLTROs, political risks and falling redemptions should have a mitigating effect.”

Each of the analysts said CBPP3 will continue to be a key driver of next year’s supply, even if buying remains at a relatively slow pace. The covered bond purchase programme is widely expected to be extended beyond its earliest end-date (currently March 2017), in conjunction with the Eurosystem’s other QE programmes.

Some 94% of respondents to SG’s survey expect CBPP3 to be extended beyond March 2017, and 31% believe it will keep going beyond September.

Florian Eichert, head of covered bond and SSA research at Crédit Agricole, said issuers might look to pre-fund 2018 maturities while CBPP3 is still running and keeping spreads tight. This could potentially increase supply in the first half of 2017 in particular, he said.

“Going out and prefunding, and thereby adding even more liquidity to an already liquid position, is something that needs careful consideration,” he said. “Issuers who do, however, expect the happy days, as far as spreads are concerned, to not last through to the exit could still see sense in going early.

“Euro benchmark covered bond redemptions in 2018 will only be around Eu88bn so we are not talking about dramatic numbers and the scope for pre-funding might be moderate, but still.”

However, the forecasts suggest factors expected to curb issuance will have the upper hand – among them lower redemptions of around Eu123bn, some Eu20bn-Eu30bn less than this year (based on analysts’ differing figures).

The ECB’s second series of Targeted Longer-Term Refinancing Operations (TLTRO II) was considered one of the major contributors to a slowdown in peripheral covered bond issuance this year, and is expected to remain an all too appealing alternative to issuance.

“As the final tranche can be drawn in March 2017, this topic will also play a role in the first half of 2017 and even beyond,” said Franz Rudolf, head of financials credit research at UniCredit.

In addition, the analysts saw uncertainty stemming from Brexit negotiations, Italy’s constitutional referendum next month, and elections in France and Germany next year as having the potential to affect primary markets.

The majority of investors, meanwhile, expect covered bond spreads to widen next year, according to the surveys. Some 58% of respondents to SG’s survey expect core Eurozone spreads to widen, and 79% expect peripheral Eurozone spreads to widen. In NordLB’s findings, 60% of respondents expect spreads to widen overall.