The ECB’s €750bn Pandemic Emergency Purchase Programme (PEPP) will inevitably support covered bond spreads and issuance, according to analysts, with the Eurosystem potentially increasing its new issue order share beyond 50%, even if the asset class’s share of overall net purchases could fall.

The new temporary programme with an “envelope” of €750bn, announced yesterday (Thursday) evening, will include all asset categories eligible under the existing asset purchase programme (APP), and be conducted until at least the end of this year and end once the governing council judges the coronavirus crisis phase to be over.

A covered bond analyst said the “masses” of purchases are bigger than anything the market has seen before.

“Whether it’s positive or negative,” he added, “it’s probably the only way given these uncertain times.”

ECB president Christine Lagarde was criticised in some quarters for comments at a press conference following a governing council meeting last Thursday (12 March) where an initial €120bn boost to APP was among measures announced, but a statement yesterday in which she said there are “no limits” to the central bank’s commitment to the euro was widely deemed apposite.

“You could say it’s another ‘whatever it takes’ moment,” said the analyst, “because essentially they are saying they are here to prevent the market breaking down completely.”

Although the ECB defined eligibility criteria largely similar to APP, as with the existing programme it did not offer details on any planned breakdown of purchases across asset classes, nor specify the rate at which the €750bn could be spent.

A few analysts said that assuming APP criteria apply to PEPP, some €75bn of additional covered bond purchases could be made by the Eurosystem in 2020, although other analysts reserved judgement on the possible breakdown of purchases.

One covered bond analyst said the “huge amount” would absorb much of the euro covered bond market for the rest of the year.

“The PEPP split is crucial,” he said, “the key issue being how much of the €750bn will be covered bonds.

“But even if its 5%, it’s going to be a lot, so I think the share will be lower than the existing APP share.”

He noted that the ECB is expanding the range of eligible corporate sector purchase programme (CSPP) assets to non-financial commercial paper, and further that it will reconsider revising “self-imposed” limits that could hamper actions required to fulfil its mandate, which has been widely understood to mean that ISIN limits in the public sector purchase programme (PSPP) could be raised.

Three issuers approached the primary market with new euro benchmark issues this morning (see separate article), including the first CBPP3-eligible deal in more than two weeks, and the first analyst said the market was clearly buoyed by the announcement.

“Without this programme,” he said, “I’m pretty sure the two Canadians and Axa would not have issued today.

“What’s more, the fact a Eurosystem-eligible issuer has come to the market is an even better sign, given they probably could have used TLTRO funding, yet have opted to issue a covered bond in relatively horrible conditions.”

Analysts said the launch of PEPP will lead to higher Eurosystem orders for new issues than the recent standard of 40% – something that had already been anticipated after the ECB’s more modest measures announced last week.

“It remains the easiest way for them to buy covered bonds,” said one. “I wouldn’t be surprised if they went higher than 50% and that allocations were quite a bit higher than what we’ve seen before.”

NordLB analysts anticipate an increase in orders to 60% of expected new issue sizes, with an allocation ratio of 50%, given that PEPP will come on top of net APP purchases and taking into account redemptions in the CBBP3 portfolio.

“The ECB would thus buy around €28bn of covered bonds on the primary market by the end of the year,” they said. “Consequently, €100bn would have to be purchased on the secondary market to reach the required amount of covered bonds.”

The €28bn estimate compares with a NordLB forecast implying €55bn of Eurozone issuance across the remainder of the year.