The ECB made €2.45bn of net CBPP3 purchases in November, 10.2% of the month’s €24.1bn net APP increase, with analysts suggesting the activity in the first full month of rebooted QE reflects a greater focus on the private sector programmes, potentially compressing spreads further.

The November €24.1bn overall asset purchase programme (APP) total is some €4bn greater than the €20bn a month former European Central Bank president Mario Draghi stated would be the rate when he in September announced the restart of net purchases. Market participants said this was unsurprising ahead of a slower market and lower levels of liquidity in December, during which the ECB will temporarily halt APP purchases from 19 December to 31 December.

“It will try to purchase more so as not to distort the markets too much when liquidity and primary market activity are low,” said Cristina Costa, senior covered bond analyst, SG, “and this means there will be less purchases in months like August and December and slightly more in the other months.”

In previous rounds of QE frontloading and backloading has typically occurred around holiday periods. On Friday, León Fernández Brennan, portfolio management expert at the ECB, emphasized that the €20bn figure will represent an average over the course of the programme, and that monthly totals will therefore vary.

Florian Eichert, head of covered bond and SSA research, Crédit Agricole, said the €2.45bn of CBPP3 purchases in November was “bang on target” with his expectation of some €2bn a month when taking into consideration the pre-holiday over-purchasing.

CBPP3’s €2.45bn constituted 10.2% of the €24.1bn APP November total, CSPP (corporate sector purchase programme) 24.5%, ABSPP (asset backed securities purchase programme) 5.2%, and PSPP (public sector purchase programme) 60.1%.

Analysts said the breakdown suggests the ECB is shifting away from the PSPP and more towards the private sector programmes, even though the former remains the largest of the programmes. Costa, for example, noted that that net private sector purchases of €9.63bn in November were almost double the €5bn a month SG had forecast.

Eichert said the overall private sector programme purchases share was higher than Crédit Agricole’s house view of around 30%, adding that the ECB may be forced to further upsize its CBPP3 purchases.

“Should the bigger focus on the private sector continue to show in the coming months, the CSPP run out of steam, and the ABSPP start to register net negative purchases again,” he said, “the pressure the Eurosystem will (have to) put on covered bond markets could become very noticeable.”

CBPP3’s APP share of 10.2% compares to an average share of 7.5% during 2018 and 8% from March 2015 to December 2018, according to Joost Beaumont, senior fixed income strategist at ABN Amro. He said that if the ECB keeps its monthly target of total net purchases at €20bn in 2020, total CBPP3 purchases will equate to around €24bn. Including around €30bn of reinvestments, gross covered bond purchases from APP would total €54bn, a monthly average of €4.5bn.

However, ABN Amro’s base case scenario is for the ECB to double its monthly target to €40bn from April onwards, taking total net covered bond purchases to €42bn in 2020, total gross purchases to €72bn, and the monthly average to €6bn.

“The key message is that the central bank will remain a dominant player in the covered bond market for the time being,” he said, “which should compress spreads.”

Although the CBPP3 portfolio grew €2.45bn in November, last week the Eurosystem’s CBPP3 holdings of covered bonds fell by €172m, with settled and outstanding purchases standing at €263.203bn as of Friday. This was due to redemptions of around €900m and purchases of €800m (the ECB only releases these figures to the nearest €100m).

Photo copyright: Angela Morant/ECB