Covered bond spreads were stable in the wake of mixed announcements from the European Central Bank this (Thursday) afternoon, with an expected extension of QE balanced against a monthly Eu20bn reduction in purchases – something one analyst said should not affect CBPP3.

The ECB announced that it will continue its purchases under its asset purchase programme (APP) at the current pace of Eu80bn per month until the end of March, which had previously been the programme’s earliest end date. From April, purchases are now intended to continue at Eu60bn per month until at least the end of December 2017.

“If, in the meantime, the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the governing council intends to increase the programme in terms of size and/or duration,” said ECB president Mario Draghi.

Most market participants had expected the ECB to announce an extension to the asset purchase programme (APP) by a minimum of six months, although there was no consensus on whether the monthly target would be changed.

Joost Beaumont, senior fixed income strategist at ABN Amro, said he does not expect the Eurosystem to substantially change the pace of its covered bond purchases under CBPP3 through to the end of 2017.

“Overall, we do not think that this will significantly change the central bank’s behaviour related to CBPP3,” he said. “We do think that the amounts that the central can buy on the secondary market are likely to decline during the year, while reliance on the primary market is expected to increase slightly.”

Covered bond spreads were seen stable after the announcements.

“They haven’t moved,” said a syndicate banker. “We’re not seeing any flows at all.”

Draghi said that the governing council had not discussed the subject of tapering APP purchases or of ending the programmes ahead of schedule, and said the ECB “was far away from any such high class problem”. When pressed to explain the difference between the announced reduction of purchases and tapering, Draghi said tapering would mean a policy whereby purchases are gradually reduced to zero.

“That has not even been on the table,” he said.

Some market participants said the lower purchase volumes represented tapering in all but name, and suggested that markets would interpret the move as such. Others argued that an additional nine months of APP buying could not be considered a phasing out of the programme.

“We will call it tapering or phasing-out if and when the bazooka is cut back step by step and not by a one-off,” said analysts at NordLB. “This assessment was underlined by the ECB president several times.

“If we have seen already the final adjustment of the APP, we do not know. Most probably even the council does not know yet.”

Draghi also announced that the purchase of securities with yields below the ECB’s deposit facility rate of minus 0.40% will as of January 2017 be permitted, “to the extent necessary”.

Earlier in the year, analysts had said that the removal of the deposit rate floor was necessary if the ECB was to avoid hitting limits in its CBPP3 buying, as shorter dated covered bonds in many jurisdictions were yielding below minus 0.40%. Since a recent back-up in yields, however, much of the curve has moved back into positive territory.

“This technical difficulty has certainly eased significantly on account of the recently observed yield increase,” said analysts at NordLB, “yet we had also indicated in the run-up to the meeting that the ECB would certainly be keen to avoid any difficulties with this issue again and would therefore abandon the yield floor.”

They noted that short-dated Bunds turned more deeply negative in the wake of the floor’s removal, and that even Bunds with a remaining term of five years quickly reached the previous floor of minus 0.40% after having just a few minutes earlier reached one of their highest levels (minus 0.28%) since spring.

Photo credit: ECB/Flickr