The ECB will restart net APP purchases on 1 November and although a monthly rate of EUR20bn is below many forecasts, the overall package of measures announced today (Thursday) is expected to support covered bonds – even if investors and issuers decried renewed QE at an ECBC plenary yesterday.

The European Central Bank this (Thursday) afternoon announced a broad package of measures that had widely been anticipated since ECB president Mario Draghi flagged concerns about the development of the Euro-area economy at Sintra on 18 June. The ECB announced: a cut to the deposit rate from minus 0.40% to minus 0.50%, but the introduction of a tiering system; made the terms of TLTRO III more attractive; changed its forward guidance from being “calendar-based” to “state-based”, in Draghi’s words; and will restart net purchases under its asset purchase programme (APP) at a rate of EUR20bn per month from 1 November, for “as long as necessary to reinforce the accommodative impact of its policy rates”.

Although the monthly APP amount and rate cut were at the lower end of expectations, the other changes were generally received as more dovish than anticipated, with the net result leading to the yield on the 10 year Bund – which had crept up on recent days – falling sharply, before it retraced and ended the afternoon almost unchanged.

“Cash markets are tighter,” said a syndicate banker. “Risk assets like sub debt or Italy have outperformed.

“Covered bonds are very tight, so have not moved much, but today’s measures offer a supportive environment.”

The ECB released information about some of its measures after the post-governing council meeting press conference, but did not provide a substantial update on APP, while Draghi said that there had been no discussion of changes to purchase limits and that the programme would be “by and large” the same. CBPP3 constituted on average around 6% of APP purchases, suggesting the ECB could buy some EUR1.2bn net of covered bonds per month, on top of redemptions that average EUR1.8bn for the rest of this year and EUR2.5bn next year.

Covered bond analysts’ forecasts of monthly APP purchases had averaged around EUR30bn, but although the EUR20bn is lower, market participants still expect the amount – alongside the ECB’s other measures, and particularly the open-ended nature of its commitments – to support the covered bond market.

A covered bond analyst said that he wouldn’t be surprised to see the Eurosystem entering the primary market aggressively from 1 November, arguing that it is “the easiest way” if it wants to buy in size quickly, with the secondary market illiquid. The Eurosystem has previously flagged front-loading of purchases in November ahead of seasonal December breaks.

“In November the market should be open very, very wide,” he said, “as the ECB should support deals very, very handsomely. Things could be worse for issuers.”

The syndicate banker noted that the Eurosystem has been buying around 5% of new issues as it reinvests redemptions, while it took around 10% of new issues in the last quarter of 2018 when the monthly APP total had been lowered to EUR15bn ahead of its end at the turn of the year.

He suggested issuance could pick up in the next couple of weeks, following industry events in Munich this week, arguing that the lower-for-longer mantra has been reinforced by today’s package and investors will have to accept negative yields more than ever.

“There is no reason for anyone to sit on the fence,” he said.

While investors speaking at the European Covered Bond Council (ECBC) plenary in Munch yesterday (Wednesday) acknowledged that they would have to learn to live with negative yields, Lucette Yvernault, head of systematic fixed income at Fidelity international, said that further QE would be “a disaster”, and Claudia Bärdges-Koch, head of debt investor relations and client acquisition at Münchener Hypothekenbank, called it a “horror scenario”.

Bodo Winkler, head of funding and investor relations at Berlin Hyp, said that CBPP3 had done a lot of harm to the covered bond market and that renewed buying would occur in “an even worse environment”, with yields so negative.

“If you now imagine on top of these yields a decrease in spreads bringing us back maybe to the area of minus 20bp, which I think was the lowest we achieved in the primary market, who should buy that?” he asked. “Then the ECB should go out and say, OK, I will not restrict my order to 50%, I will buy 100%. Because I cannot think of other investors who are willing to pay that.”

Berlin Hyp was the first issuer to sell a covered bond below the ECB deposit rate and the central bank today said that it will with immediate effect be able to buy assets with yields below the deposit rate facility across the asset purchase programme. Previously it had only been able to do so, since January 2017, under the public sector purchase programme (PSPP).