Net CBPP3 settlements fell to their lowest of any month in the history of the programme in June, at EUR683m, on the back of record redemptions and in spite of a month-on-month rise in gross purchases. Analysts said the ECB’s approach offered clues to how it will conduct future reinvestments.

The CBPP3 portfolio increased EUR683m in June, although when a quarter-end amortisation of EUR533m is taken into account, the valuation of the portfolio has risen less, from EUR254.272bn as of the end of May to EUR254.422bn as of the end of June.

These are the lowest net CBPP3 settlements in any month since the programme was launched – lower even than in December months when purchases were temporarily suspended – and down from EUR2.044bn in May. The CBPP3’s share of overall net QE settlements fell to a record low of 2.2%, down from 6% in May.

The fall came on the back of CBPP3 portfolio redemptions that will be the highest in any month this year, of EUR3.202bn. Factoring in these redemptions, gross purchases amounted to EUR3.885bn, up from EUR3.179bn in May.

“Given the large amount of redemptions, the Eurosystem was able to buy ‘only’ EUR683m on a net basis,” said Joost Beaumont, senior fixed income strategist at ABN Amro. “The latter was sharply down from the EUR2bn or more of net covered bond purchases since the start of the year.

“However, we judge that this mainly reflects that the central bank had a large reinvestment need of covered bonds in June, rather than an intended shift in policy. Indeed, the average monthly amount of gross covered bond purchases has been EUR4bn since the start of the year.”

Primary settlements in June contributed EUR923m to gross purchases, similar to May, but secondary buying contributed almost EUR3bn, up from EUR2.2bn the previous month.

Analysts at Commerzbank suggested the ECB’s apparent decision to not increase its secondary market purchases even more substantially in order to keep CBPP3’s share of total APP buying in the normal range reflect that the ECB is leaving itself sufficient flexibility in replacing its redemptions and is acting rather defensively so as not to put undue strain on the market.

“Covered bond maturities neither have to be replaced instantly nor within the same product if the market does not allow it,” they said. “This will likely be the case in 2019 as well, when net purchases are stopped altogether and only redemptions are reinvested.”

The Commerzbank analysts expect that the ECB will similarly not insist on replacing future CBPP3 maturities after the expected end of the programme, at the end of this year, on a strictly one-for-one basis with new covered bond purchases if liquidity is insufficient.

“Some are likely to migrate to other purchase programmes, as already seems to be happening,” they said.

Redemptions in the CBPP3 portfolio will be lower in the coming months, with EUR1.617bn due to redeem in July and just EUR475m in August. Analysts therefore expect net CBPP3 settlements to rise back towards the 2018 average.

Weekly settlements positive again

ECB figures released on Monday show the CBPP3 portfolio increased EUR192m in the week to last Friday, from EUR254.230bn to EUR254.422bn. Figures released on Tuesday show that around EUR400m CBPP3 holdings matured last week. When the quarter end amortisation adjustment of EUR533m is taken into account, gross purchases totalled around EUR1.125bn.

In the previous week, gross purchases amounted to around EUR355m. Last week was the first in three weeks in which net CBPP3 settlements were positive, with redemptions having exceeded purchases in the previous fortnight.

Five CBPP3-eligible benchmark deal settled last week, totalling EUR3bn of supply, of which analysts estimate the Eurosystem bought around EUR460m. This implies that secondary market purchases averaged around EUR133m per day last week, down from estimates of around EUR51m per day in the previous week.