CBPP3 portfolio growth slowed in March amid a debate over the ECB’s intentions, and after redemptions, an amortisation adjustment and Easter resulted in the value of covered bond holdings falling over the last two weeks of the month. Primary purchases increased over the month, however.

Net CBPP3 purchases totalled EUR2.897bn in March, according to ECB figures released on Wednesday, taking the portfolio from EUR247.104bn to EUR249.452bn, incorporating a quarter-end amortisation adjustment of some EUR550m. Gross purchases totalled EUR4.138bn, given redemptions of EUR1.241bn last month.

This compares with net portfolio growth of EUR3.055bn and gross purchases of EUR4.381bn in February, and makes March the quietest month of the year so far for the CBPP3 programme, in spite of there having been more CBPP3-eligible issuance in March than in February.

Analysts noted that CBPP3’s share of overall asset purchase programme (APP) buying fell slightly, from 10.1% in February to 9.4% in March, but remained well above the average of 5% in 2017, reflecting that the majority of the reduction in monthly QE purchases has taken place under the public sector purchase programme (PSPP).

The PSPP share of total purchases fell to a record low in March, of 67% of total purchases. Overall APP purchases amounted to EUR30.890bn, hitting the ECB’s EUR30bn monthly target.

“While the Eurosystem has continued to focus on private sector purchase programmes, with the PSPP share staying around only two-thirds, CSPP and ABSPP net purchases gave the central bank the opportunity to keep the CBPP3 net purchase share near 10% last month,” said Florian Eichert, head of covered bond and SSA research at Crédit Agricole.

“Despite the recent rumours around the Eurosystem putting in lower orders in new issues, we do not believe this is yet the beginning of the end,” he said. “Should we get a slower month in the other two private sector purchase programmes, the CBPP3 will immediately gain in prominence again.”

Last week, one CBPP3-eligible benchmark settled, a EUR500m long six year issue for Aareal Bank. According to syndicate bankers, the Eurosystem requested around 40% of the trade, as with a EUR500m issue for WL Bank – which like Aareal was deemed to have struggled – and a EUR750m issue for BNP Paribas Fortis, both of which settled in the previous week. Historically, the Eurosystem has typically requested around 50% of trades under CBPP3.

Market participants have debated the reasons for change in the Eurosystem’s approach, with many believing it to be a deliberate strategic decision aimed at signalling that CBPP3 support will eventually end, but some suggesting it could be due to the ECB nearing its targets for covered bond purchases.

“We are not sure that the ECB really wants to send out a political signal,” said Michael Weigerding, research analyst at Commerzbank. “We think it is just as likely that it has applied the brakes because the covered bond supply to date and its rising allocations have exceeded the targets.

“After all, a relatively large number of new deals have had to make greater use of the CBPP3 this year than was usual in 2017 in order to secure an adequate placement.”

Despite the lower orders for the three deals at the end of the month, the ECB’s primary market purchases increased from EUR2.050bn in February to EUR2.543bn in March. Karsten Rühlmann, senior investment analyst at LBBW, noted that March’s primary market purchases are well above the average of the last year, of EUR1.808bn.

“In our opinion, attention should be paid to the eligible issues over the coming weeks before clearer statements can be made,” he said.

Three CBPP3-eligible deals have been issued this week, the first such supply since Aareal’s deal, comprising a EUR1.5bn issue for CFF, a EUR1.25bn issue for ABN Amro and a EUR1.75bn issue for ING Bank. Distribution statistics show that central banks and official institutions were allocated 42%, 29% and 24% of the deals, respectively.

Syndicate bankers that worked on one of the three deals suggested that the Eurosystem’s order was in that case in line with those made for the BNP Paribas Fortis, WL Bank and Aareal deals.

In the week to last Friday (30 March), the CBPP3 portfolio decreased EUR295m, from EUR249.747bn to EUR249.452bn. Figures released yesterday (Thursday) afternoon show that no holdings in the CBPP3 portfolio matured last week. The EUR550m amortisation adjustment was therefore solely responsible for the fall in CBPP3 holdings, and gross purchases therefore totalled some EUR255m.

This is substantially below the EUR1.176bn of gross purchases in the previous week and the average of around EUR1.218bn per week so far this year.

As net purchases amounted to around EUR176m in the previous week, on the back of EUR1bn of redemptions, any net growth in the portfolio over the last two weeks of March was eclipsed by the EUR550m amortisation adjustment. Analysts highlighted that the Easter period, bringing lower liquidity and a shortened trading week, will also have had an impact.

Analysts’ estimates of the split between primary and secondary CBPP3 settlements last week assumed the Eurosystem bought around 40% of Aareal’s deal, EUR200m. This implies that secondary market purchases were once again around their lowest levels of the year so far, at as little as some EUR14m per day, compared with an estimated EUR15m-EUR35m per day in the previous week, for which analysts estimated the Eurosystem bought around EUR1bn-EUR1.1bn on the primary market, out of EUR3.25bn of eligible primary market settlements.

Photo: Frankfurt Luminale 2018 at the ECB headquarters