Bankers have suggested the ECB could resume CBPP3 purchases as early as this Friday, focusing on settlement dates from 1 November rather than trade dates, but whether issuers will test this assumption with new issues, and the percentages the Eurosystem will buy, is uncertain.

The market has been anticipating the restart of the European Central Bank’s overall asset purchase programme (APP) since it was announced by outgoing ECB president Mario Draghi on 12 September, with net purchases due to restart at a monthly pace of €20bn “as from 1 November”, in his words.

Whereas the Eurosystem has previously begun covered bond purchases from the official start date of the three purchase programmes, the fact that the ECB is restarting its latest programme rather than launching a new programme appears to have resulted in a consensus that it could pre-emptively execute trades that settle from 1 November (Friday of next week) onwards and not only from that date.

“There is a good chance the ECB will step in at the end of October in the covered bond market,” said one covered bond analyst.

He said ECB purchases in the primary market could start this Friday (25 October) and in the secondary market from next Wednesday (30 October), assuming the use of regular business day terms (T+5 and T+2, respectively) that would land them on a 1 November settlement date.

A syndicate banker said that while some issuers have already taken advantage of the support the ECB’s announcement has provided the market, others have been waiting for the programme to begin to lock in the additional demand.

“A few from the second camp will start to issue,” he said. “I would be surprised if it were on Friday, but definitely from Monday.”

The covered bond analyst echoed this, noting that some issuers have appeared hesitant to approach the market, with no new euro benchmarks launched this week, even if market conditions have looked promising as a back-up in yields has supported demand.

“Some are probably standing on the sidelines and waiting for confirmation from the ECB,” he said, “because execution risk is thereby reduced.”

He noted that blackout periods have been a factor constraining some issuers and another syndicate banker said that as reporting season progresses, a pick-up in activity is likely – even if he suggested some banks may opt for higher beta trades.

“November will definitely be a more active month,” he said, “on the back of CBPP3 starting and liquidity should be much better.”

But he cautioned that CBBPP3 buying before 1 November is far from certain.

“Historically the settlement date of transactions has been the focal point during the winding down of ECB purchase programmes,” he said, “so you could perhaps assume it might be the case for the beginning.

“However, this is all speculation as they have not said anything explicit about it.”

A handful of euro benchmarks suffered weaker than expected demand last year when they hit the market just as the Eurosystem was reducing the share of new issues it was buying. Although the ECB pre-announced in which months reductions to its monthly APP target would come into effect, in those instances it cut its orders towards the end of the previous month for those new issues that were not being settled by month-end.

Bankers’ estimates for the share of new issues the Eurosystem could seek to buy – which will also have to cover reinvestments – vary widely, from 20% to 50%.

The analyst said purchases could be up to 30%-40% of euro benchmarks in the primary market, but that the figure would be dependent on the Eurosystem’s activity in the secondary market.

“Overall, the ECB will start buying intensive amounts of covered bonds because there is not much room for govvies anymore in the overall APP,” he added.

One syndicate banker expects the ECB to purchase 20% of primary issuance and played down the impact of this, saying that it is of an order of magnitude similar to what some traditional investors might by. He said the question of secondary market purchases is more pertinent.

“Given the absence of liquidity or volumes in secondary for a while now,” he said, “they might have a way more significant impact there then whatever they’re going to do in primary.”

Photo: Mario Draghi receives an award from ECON chair Irene Tinagli on the occasion of his last appearance before the European Parliament on 23 September; Source: Dominique Hommel/EP; Copyright: EU