The CBPP3 portfolio last week grew by the largest amount in seven weeks, as eligible supply picked up to its highest level over the same timeframe. Meanwhile, lthough the €600bn PEPP increase is not expected to significantly alter CBPP3 purchases, some analysts still see damage limitation as the best that can be hoped for.

According to data released by the European Central Bank relating to settled and outstanding purchases under its various programmes on Monday, the CBPP3 portfolio grew €1.219bn in the week to last Friday. Given redemptions of €200m last week, according to data released on Tuesday, gross purchases were €1.419bn. The net and gross increases are both the highest in seven weeks, since the week ending 17 April when the portfolio grew €1.515bn and gross purchases were €1.715bn.

The above average increases come in parallel with the highest amount of eligible settlements since the same week in April, when €3bn supply settled, according to analysis by Crédit Agricole. Two issues totalling €2bn settled last week: a €1bn five year from KBC and a €1bn 10 year from Arkéa Home Loans SFH on 3 and 5 June, respectively, of which Crédit Agricole analysts estimate the Eurosystem bought around €200m.

“The recent new issues seem to have also given secondary market activity levels a small boost,” they added.

On Thursday, the ECB announced a €600bn increase to its Pandemic Emergency Purchase Programme (PEPP) and an extension until at least the end of June 2021. Considering the first breakdown of PEPP purchases released last week revealed that covered bonds constituted only 0.9% of net purchases, several analysts do not expect the move to have a major impact on Eurosystem covered bond purchases.

Crédit Agricole analysts said the low number means that the “additional damage” to the market from PEPP, and any increase to it, on top of APP buying is limited.

“The ECB seems to appreciate it can only buy so much in the covered bond space without turning a distortion into a disruption,” they said, citing monthly purchases of €4.5bn net and €6.5bn gross, based on €1bn of PEPP purchases on top of CBPP3.

“Increasing the pace further would in our view only work if primary markets surprise to the upside or the ECB accepts that covered bonds trade flat to the likes of KFW or e-names [EIB, EFSF, ESM, etc] to incentivise additional bank treasury selling,” they added. “However, at these levels it will have turned a distorted into a disrupted market and the ECB cannot really have an interest in that in our view.”

But DZ analysts were more concerned by the ECB’s intentions. They said Thursday’s announcement poses a further threat to the covered bond market in that while it may appear marginal, it will further drain liquidity from the sector, with supply set to turn negative in the second half of the year. They calculate that gross monthly CBPP3 purchases will fluctuate between €5bn and €11.2bn until December, and average €8bn, compared with around €5bn of eligible euro benchmark supply per month.

“A comparison of these figures already highlights two important conclusions,” they said. “The ECB must continue to make the bulk of its purchases in the secondary market.

“Investors could be pushed into neighbouring asset classes,” they added. “Their interest in covered bonds could further weaken against the background of low spreads, low performance opportunities and a low level of new issues. PEPP will increase these risks for the covered bond market in the coming weeks and months.”

PEPP overall grew €25.463bn last week, versus €22.807bn the previous week, with gross purchases coming in at €25.663bn, given €0.2bn of redemptions.

Gross APP purchases were €16.154bn, up €7.079bn from €9.075bn the previous week, bringing aggregate Eurosystem purchases across the two programmes to €41.817bn. This is up €9.935bn from €31.882bn the previous week, which was lower than average due to national holidays in some EU countries.

Last week’s net APP increase of €13.454bn was also up considerably from €1.575bn the previous week, while redemptions fell significantly, from €7.5bn to €2.7bn.