The ECB’s deferral of a decision on QE tapering leaves the covered bond market open for issuance, with bankers forecasting continued spread stability. However, the primary market is expected to remain subdued next week as market participants head to industry events in Barcelona.

In a press conference yesterday (Thursday) afternoon, ECB president Mario Draghi said the ECB had held a “very preliminary” discussion on how to phase out its asset purchase programme (APP). He said the ECB will decide this autumn on the calibration of its policy instruments beyond the end of 2017, adding that it “should be ready to give the bulk or to take the bulk of these decisions in October”.

“We will announce when we are ready,” he said. “The sense is that in October we should be ready but if we are not, then we will postpone.”

The ECB kept its forward guidance on QE unchanged, stating that the asset purchase programme is intended to run at its current pace until the end of December or beyond and that the size and/or duration of the programme could be increased, if necessary.

Draghi also said that the governing council had not discussed the potential scarcity of assets that can be bought under the programmes.

“I’m pretty confident that when the policy decisions time comes we’ll certainly be able to exploit all the flexibility that the programme has in its construction,” he said.

Prior to the summer, market participants had widely expected Draghi to announce a tapering of the ECB’s asset purchases after yesterday’s governing council meeting. However, the consensus shifted, with most market participants expecting the ECB to hold fire in the run up to the press conference.

The 10 year Bund yield fell in the wake of the press conference to 0.29% – its lowest level since late June – although it rose to 0.32% this morning after Reuters reported that the ECB had at Thursday’s meeting agreed on the need for a cut in QE purchases.

Euro covered bond spreads remained stable, and analysts expect them to continue to move sideways until October – although they acknowledged there is potential for widening should a surge of September supply hit the market.

Bankers said the ECB meeting left the market open for new euro covered bond issuance, with conditions expected to remain supportive next week. This comes after five euro-denominated benchmark issues (including a Eu500m FRN for Nykredit) from a range of jurisdictions all received a strong reception this week, making this week the busiest in the euro market since the week commencing 19 June.

However, the window for issuance will be narrowed by industry events in Barcelona on Wednesday and Thursday of next week, so expectations for supply are low.

“It’s going to be quiet,” said a syndicate banker. “You may see a trade at the start of the week, but issuers tend to use the conference as a springboard to issue, so I don’t see why people would rush to go before.”

The rally in Eurozone government bonds means covered bonds are increasingly attractive versus their underlying sovereigns, noted Joost Beaumont, senior fixed income strategist at ABN Amro.

The ECB is still widely expected to start reducing its QE purchases in 2018, and bankers expect the announcement – when it comes – to prompt moderate widening in covered bond spreads, with the ECB’s continued investment limiting the scale of any moves.

“While some of today’s rhetoric suggests that the tapering announcement in October is likely, it seems that the bond market interpreted his message as being dovish, in contrast to the currency market, at least for now.” said Kim Liu, senior fixed income strategist at ABN Amro.

He noted that the 10 year Bund yield fell below 30bp while peripheral sovereign spreads tightened. Movements in Euribor futures and Eonia forwards show the market has priced out rate hikes until 2019, he said.

“Although it seems that investors have weighed Draghi’s cautious wording and interpreted these as dovish, we warn that there is an increased risk of a market correction at the ECB’s October governing council meeting,” he said. “With complacency of investors riding high, any October tapering announcement could result in an even more violent reaction in fixed income markets.

“This is the inevitable price Mr Draghi will have to pay for not preparing the market today.”