The revelation that covered bonds contributed less than 1% of the first two months of PEPP net purchases means the Eurosystem could have a weaker impact on spreads than implied by earlier bullish forecasts, although an expected announcement of a PEPP increase tomorrow (Thursday) could yet provide a fillip.

The European Central Bank (ECB) yesterday (Tuesday) gave the first breakdown of PEPP purchases since it was activated on 26 March, covering purchases up to the end of May. The figures had been eagerly awaited for clues into the ECB’s strategy for what had hitherto been an opaque programme with greater discretion for the Eurosystem than under the asset purchase programme (APP).

Public sector securities constituted €186.6bn (79.5%) of the total PEPP net purchases of €235.7bn to last Friday, commercial paper €35.4bn (15.1%), corporate bonds €10.6bn (4.5%), and covered bonds just €2.1bn (0.9%) (no asset-backed securities (ABS) were purchased). PEPP redemptions have totalled only around €0.3bn since its start, meaning gross purchases (which were not disclosed) will be very close to the net purchase amounts.

Within the public sector purchases – which largely correspond to the public sector purchase programme (PSPP) element of APP – the biggest deviations from the ECB’s capital key were in favour of Italy and against France, although the amounts have not been considered extreme.

Of covered bonds’ contribution to the net increase, €419m was sourced in the primary market – versus over €10bn of eligible issuance – and €1.680bn in secondary.

ING analysts described the €2.099bn of covered bond purchases as “just a drop in the ocean”.

Joost Beaumont, senior fixed income strategist at ABN Amro, was among those who said that the Eurosystem had probably been significantly topping up its CBPP3 purchases behind the scenes, having suggested that perhaps 5% of buying under the €750bn programme comprising covered bonds.

“I had expected a much higher number,” he said of yesterday’s figures. “Overall, the figures show that the Eurosystem provided support to markets that needed it the most.”

Should the share of covered bonds in APP and PEPP and the sizes of the two programmes be maintained, the Eurosystem will have bought around €46bn by year-end, according to Beaumont – roughly half his previous forecast.

Some analysts had from the start been less bullish on PEPP covered bond buying, among them Florian Eichert, head of covered bond and SSA research at Crédit Agricole CIB (CACIB).

“Quite frankly, I never expected the PEPP to buy much in the private programmes,” he said. “You already have the APP and the temporary envelope that are focussed on private assets for as much as those markets can deliver.

“PEPP was always going to be bits and pieces, if you ask me, with the bulk of the buying focussing on govvies.”

Bernd Volk, head of covered bond research at Deutsche Bank, echoed this.

“In our view, the low CBPP3 purchases under PEPP confirms that PEPP is mainly focussing on public sector assets,” he said, “but also suggesting that the ECB is driven by perceived necessity, with covered bonds tightening strongly already in recent weeks without higher purchases under PEPP.”

May’s net APP increase was €38.183bn, with PSPP contributing €28.961bn (75.8%), the corporate sector purchase programme (CSPP) €5.438bn (14.2%), and CBPP3 €3.785bn (9.9%) – ABSPP holdings fell €1bn). CBPP3’s €3.875bn is the highest monthly net increase this year and compares to an average of €3.574bn, according to CACIB analysis, although gross purchases came in at €4.156bn, the lowest of the year and versus a €5.560bn average.

The consensus expectation is for the ECB to announce a major increase to PEPP tomorrow after its latest governing council meeting, with a €500bn boost a common forecast, but analysts suggesting numbers as low as €250bn and as high as €750bn, i.e. a doubling in size.

Some analysts expect covered bonds to continue to have a bit part in the programme, even if it is increased, but ABN Amro’s Beaumont said buying could be lifted from the low levels in tandem with PEPP, in which case purchases to year-end would exceed the abovementioned €46bn.

“In any case,” he added, “it remains the case that the Eurosystem will buy a significant amount of covered bonds this year on a net basis, while it also has to reinvest €33bn of maturing covered bonds. As such, our narrative that this, together with negative net supply during the remainder of 2020, will provide a strong technical support for spreads remains in place.

“However, the strength of the support would of course be somewhat weaker if it buys less covered bonds than we expected earlier.”