The ECB raised the prospect of some belated transparency around PEPP covered bond purchases yesterday (Thursday), while announcing another sweetening of TLTRO III terms that some – but not all – analysts said could further dampen already low supply prospects.

Unlike its Asset Purchase Programme (APP) – where weekly gross purchase and redemption figures are given for each sub-programme – only an aggregate weekly figure has been given thus far for the Pandemic Emergency Purchase Programme (PEPP). This has left covered bond market participants in the dark as to the extent of any Eurosystem buying beyond APP and under PEPP.

But in the question and answer session of the press conference following the European Central Bank governing council meeting yesterday, president Christine Lagarde said the ECB will every two months publish information on PEPP, applying “the same granularity principles” that apply to APP, raising hopes that a breakdown by asset class – including covered bonds – will be available, albeit with some delay.

Maureen Schuller, head of financials research, ING, was among market participants who welcomed the news.

“I’m already looking forward to it!” she said.

Lagarde’s remarks came after the ECB announced a further sweetening of the terms of TLTRO III. Over the period June 2020 to June 2021, the rate will be reduced to 50bp below the average MRO rate, instead of the current 25bp below, potentially taking it to minus 1%. Furthermore, for banks whose eligible net lending reaches the 0% lending performance threshold – which Schuller noted should be possible for most of the European banking industry – the rate will be 50bp below the deposit facility rate (DFR).

“If you can meet the lending benchmark – even if it’s short term funding – it makes sense from an economical standpoint to finance yourself with the TLTROs at this particular point in time,” she said.

“This will definitely come at the expense of covered bond supply, which is already what we have witnessed, as since this crisis started to escalate in mid-March, the Canadians and the French have been the only ones accessing the covered bond market.”

ING: Most banks could benefit from TLTRO III from a funding cost angle

Source: ING, Markit iBoxx

ING’s covered bond supply forecast for 2020 is likely to change, said Schuller, although it will not be formally updated until next month.

“For covered bonds, our forecast was already a bit on the low side,” she added. “We might see some sporadic supply even outside France, but it will drastically slow, as we have already seen in the past two months.”

The ECB also announced a new series of non-targeted, pandemic emergency longer term refinancing operations (PELTROs), consisting of seven monthly refinancing operations commencing in May 2020, with maturities out to September 2021 and an interest rate 25bp below the MRO. Unlike the targeted TLTROs, assets including mortgages and public sector loans will come under the PELTROs.

Joost Beaumont, senior fixed income strategist, ABN Amro, said that given the PELTROs are more oriented towards short term liquidity, they will not impact covered bond supply significantly, but could deter some from issuing.

“If you want money now, you could perhaps do a PELTRO now and a covered bond later,” he said, “so it’s more like a temporary effect than the TLTRO, which is three year funding and will have the largest impact.”

While acknowledging the possible influence of the ECB’s latest measures on covered bond supply, Sverre Holbek, senior analyst, Danske Bank, said these could be outweighed by a “sharp turn in sentiment” in the market.

“This is reflected in secondary spreads tightening,” he said, “but also by clearing levels in the primary market moving tighter not just at the front end but also for the maturities that issuers would normally target for their covered bond funding.”

Photo credit: Michael Steen, ECB @michaelsteen/Twitter