Aggregate gross Eurosystem buying across asset classes almost doubled in the first week of PEPP. However, opaque ECB reporting means its covered bond strategy is hard to discern and new issue orders have remained at 40% – leaving some analysts confounded.

According to data released by the European Central Bank yesterday (Wednesday) relating to settled and outstanding purchases under its various programmes as of last Friday (3 April), €30.153bn was purchased under PEPP in its first week. Gross APP purchases for the week were €18.378bn, bringing aggregate gross Eurosystem purchases to €48.531bn – up some 92% from €25.225bn of gross purchases the previous week, when only APP was running, albeit with its additional €120bn envelope.

According to Deutsche Bank strategist Bernd Volk, the full €750bn PEPP envelope will run out by September if this pace of purchases is maintained, suggesting the Eurosystem is frontloading buying.

Last week’s gross APP purchases of €18.378bn were down some €6.847bn on the €25.225bn of the previous week, as PSPP purchases fell €7.013bn. Some analysts suggested this could indicate that Eurosystem government bond purchases are being shifted from APP to PEPP, although one said it is too early to draw such conclusions.

The net APP increase of €3.978bn was down substantially from €23.625bn, but big factors in the fall were €6.6bn of redemptions as well as a €7.8bn quarter-end amortisation adjustment.

Gross purchases under CBPP3 were around €1.8bn, although €1.0bn of redemptions and a quarter-end amortisation adjustment meant the portfolio grew just €392m – down from a €1.7bn increase the previous week when no covered bond holdings matured.

Analysts said covered bond purchases that would previously have been bought under APP may also have been shifted to an extent to PEPP. However, the extent of any such change is not discernible from PEPP figures as the ECB only communicates an aggregate number – DZ Bank analyst Jörg Homey said the extent to which covered bonds are being purchased under PEPP is “pure speculation”.

Commerzbank analysts agreed that because – unlike APP figures – PEPP purchases are not broken down by asset type, the ECB’s data now lacks the transparency necessary to make any conclusive statements regarding its covered bond purchasing behaviour.

“CBPP3 figures will from now on only represent a lower limit for total central bank purchases on the covered bond market,” they said. “The actual amount could theoretically be much higher. This makes it even harder to interpret the ECB data and to understand the influence the central bank exerts on the covered bond market.”

After PEPP was announced on 18 March, some analysts anticipated Eurosystem order shares for new benchmark covered bond issues to rise beyond the prevailing 40% standard up to 50% or 60%, given that an additional €75bn of covered bond purchases could theoretically be made under the programme in 2020. However, in the first CBPP3-eligible deals issued since the activation of PEPP – from Crédit Agricole, Crédit Mutuel and CFF – Eurosystem orders did not exceed 40%, according to syndicate bankers.

Volk at Deutsche said the ECB has likely been well advised to not increase its primary market participation in order to avoid crowding out real money investors who had been active in new issues at a minimal level.

“I understand that real money remains on the sell side due to outflows,” he said, “with official institutions being the main driver of the improved sentiment.

“In the past when the ECB sometimes bought even more aggressively, real money investors complained, so maybe now they took note and realised you need some private investors in the market.”

He said that generally, and even more so considering the past three euro benchmarks have all had books in excess of €2bn, an increase in the Eurosystem order to 50% would not be a game-changer.

“Of course if they bought 70% it would make a big difference,” he added, “but I think it will remain at around 40%.”

However, Matthias Melms, head of covered bond and SSA research, NordLB, said that even though the trio of French deals were well-positioned without Eurosystem participation, it was disappointing it had not increased its primary market orders in the wake of PEPP considering more modest oversubscription levels on earlier deals from Axa Banque Europe SCF and BPCE SFH in March.

“It seems they are there when you don’t need them and not there when you do need them” he said, “as two or three weeks ago, more support would have been really, really needed.

“Especially with Axa, the orders were just enough to place the deal, so its behaviour now is disappointing.”

And Melms said the market still appears to be locked to maturities shorter than five, or at most seven years, and that an increased Eurosystem order of 50%-60% would therefore have supported the market.

“It’s all about psychology and the need for a clear signal,” he said. “They could have, for example, after the APP order put in a second order under the PEPP for a few deals and then stepped away again, just to signal that if you need support, they are there – but nothing like this happened.

“There’s a possibility they could increase their orders yet,” he added, “but saying that, it would have been enough for them to just signal once that they are willing and able to put orders in the primary market under the PEPP if necessary.”

A syndicate banker said that although an increased Eurosystem order share in the covered bond primary market could have some value, the current 40% had not appeared to undermine investor confidence, as an increasing number of investors had returned to the market.

“On these readjusted spread levels and with slightly higher all-in outright yield levels,” he said, “we are seeing more buyers returning to the market that have been crowded out before, which is undoubtedly positive.”

He said the PEPP is largely being deployed throughout secondary markets in the corporate and SSA space, and that such a strategy would continue to be welcomed in the coming weeks as it is so far proving constructive.

“The covered market is functioning well,” he said, “perhaps with the exception of the latter half of March, but the fact it was not shocked by the ECB not increasing its order after PEPP is a good sign. It’s over a week since it began, so in this context, it’s a really good modus operandi, as I haven’t heard anyone screaming for them to step and buy even more covered bonds in primary.”