Additional net asset purchases of €120bn until year-end announced by the ECB yesterday (Thursday) will support covered bond spreads and could lead to Eurosystem orders above 40% of new issue sizes, according to analysts, while more favourable TLTRO III conditions will likely dampen supply.

Following a meeting of its governing council, the European Central Bank announced a package of measures in response to the impact of the coronavirus pandemic on the economy and financial markets, including a “temporary envelope” of €120bn of additional net asset purchases until the end of 2020, “ensuring a strong contribution” from its private sector purchase programmes – ABSPP, CBPP3 and CSPP – but without giving more clarity on any breakdown and noting that it retains full flexibility within APP.

“It will be spread supportive overall,” said a covered bond analyst, “simply because they will increase demand, and the supply is limited.”

NordLB analysts interpreted the expansion of APP as increasing monthly net CBPP3 purchases this year from around €2.5bn to €3.3bn, based on an assumed 10% share of covered bonds in APP, with the level of redemptions meaning €6.2bn of monthly covered bond purchases.

However, other analysts considered the possibility of the ECB placing greater emphasis on covered bonds, with Deutsche Bank strategist Bernd Volk, for example, noting that a 25% share for CBPP3 within APP would translate into net purchases roughly double those seen this January and February, taking them back to levels seen in 2016.

The first analyst said it remains to be seen how the central bank will increase its covered bond volumes given the widespread volatility across global markets.

“Secondary markets are dried out,” he said, “and the primary market is really slow, so perhaps, for any new deal, they will order higher than 40% – but then the question is how much they will be allocated.”

An increase in Eurosystem orders to 50% of new issues would mark a return to the highs of CBPP3.

Analysts agree the corporate sector purchase programme will likely be a key beneficiary of the additional €120bn, with ING analysts saying this reflects the fewer opportunities available in the covered bond primary market, and the little room for manoeuvre under PSPP.

“Banks undoubtably will switch to the TLTROs for their funding,” they said, “leaving the CSPP as the most logical target for the additional purchases.”

However, the first analyst said that although the improved TLTRO III conditions set to be introduced from June will invariably reduce covered bond supply, they will only do so to a moderate extent.

“I would not advise you to revise your supply forecasts down massively for 2020,” he said, “at least, not as a result of what was said yesterday.”

Cristina Costa, covered bond analyst, Société Générale, said that although the improved lending conditions under TLTRO III could reduce supply, issuance levels will ultimately depend on the stability of markets.

“It’s about how erratic markets are, and the availability of issuance windows,” she said. “The markets were disappointed by the ECB measures but have since rallied, given the announcement of coordinated fiscal support.

“Right now, we are in uncharted territory and there is a general hysteria, so supply depends on a combination of negative factors getting better.

“My crystal ball has never been so blurry.”