The ECB is widely expected to announce lower-for-longer QE on Thursday, with its purchase programmes set to continue into late 2018 but at a reduced pace. CBBP3 buying is nevertheless forecast to remain steady in the short term and any spread impact muted.

After the European Central Bank governing council’s last meeting, on 7 September, president Mario Draghi said the ECB would 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”.

In recent weeks consistent signals from the ECB have raised expectations that Draghi will, after the forthcoming governing council meeting on Thursday, announce an extension of asset purchases beyond the current date of at least the end of December, but at a lower rate than the current Eu60bn per month.

This is now the base case of most ECB-watchers and market participants, but predictions of the length of the extension and the scale of reduction vary. Many now expect the purchase programmes to be extended by 9-12 months – although some think it is likely the ECB will keep the option of extending QE further, rather than setting a fixed end date – with monthly purchases to be reduced by Eu20bn-Eu40bn.

Frederik Ducrozet, economist at Pictet Wealth Management, expects the APP to be extended until at least September 2018 at a pace of Eu30bn per month.

“The ECB’s emphasis on ‘patience and persistence’ means that an even longer QE extension, at Eu20bn-Eu25bn for 12 months, looks more likely than a six month extension at Eu40bn, as per our initial baseline,” he said.

“Either way, we expect ECB communication to be articulated around the following guiding principle: the larger the reduction in monthly purchases, the longer the extension, and the stronger and the more credible the forward guidance, as the first rate hike will be delayed and QE can be extended further if needed.”

Economists at UniCredit expect net purchases of Eu30bn per month until the end of 2018.

“Over the last few days, several speeches have provided important hints about the governing council discussion at the upcoming policy meeting,” said Marco Valli, chief European economist at UniCredit.

“Two things seem to emerge: one, within the current QE parameters, the governing council could decide to spread the residual firepower over a longer period of time and at a slower monthly pace, and two, the ECB could enhance communication about its reinvestment strategy.”

UniCredit analysts had previously expected net purchases of Eu40bn per month in the first half of 2018 and Eu20bn per month in the second half of year, but said the revision of its forecast is more in line with comments from ECB chief economist Peter Praet (pictured) that, under more normal market conditions, purchases can be executed over a longer period because investors have become more patient.

Spreads are expected to widen across asset classes and jurisdictions as the ECB unravels QE. However, barring any surprises from the ECB next Thursday, the impact on the covered bond market in the near term is expected to be modest, because the majority of any reduction in APP purchases is expected to come from the public sector purchase programme (PSPP) – with the corporate sector purchase programme (CSPP) potentially picking up any slack – and because the ECB will reinvest maturing covered bond holdings.

“In the event of a direct announcement of a reduction in purchases (i.e. tapering), we would expect a noticeable widening of spreads in the covered bond segment,” said Christoph Anders, senior covered bond analyst at DZ Bank. “In contrast, an indirect announcement or milder choice of words should dampen the increase in risk premiums for covered bonds slightly.

“A decision to extend the purchase programmes with a lower monthly volume without naming a final date could represent such a variant.”

Franz Rudolf, head of financials credit research at UniCredit, estimates that covered bond reinvestments will from 2018 average around Eu2.1bn per month.

“Therefore, even a reduced monthly volume in the tapering phase of just Eu1bn is sufficient to reach the same [net] amount which has been purchased on average year-to-date, Eu3.1bn,” he said. “Thus, in our view, fundamentals for covered bonds will not change significantly.

“However, an announcement of a stronger than anticipated monthly purchase reduction could increase the effect of the psychological driver, leading to more spread volatility and increasing spread levels.”

Syndicate bankers meanwhile expect little change in prevailing highly supportive market conditions.

“Of course, spreads will eventually move away from the lows that issuers have been enjoying,” said one. “But unless Draghi springs a surprise, I think the market in November shouldn’t be very different from the market now.

“Supply volumes will be limited by blackout periods, and there is so much cash to go around.”