TLTRO III was confirmed as a major negative for covered bond supply yesterday (Thursday), with take-up in the latest round “smashing” expectations at a record €1.308tr, but analysts noted that this week’s brisk euro benchmark issuance had highlighted the instrument’s value for longer dated funding.

Although analysts had been expecting strong take-up, the €1.308tr figure was at the very high end of forecasts. As well as rolling over some €760bn from earlier LTROs – either maturities or early repayments – as anticipated, banks exceeded expectations by borrowing an additional €548bn.

The major involvement of core banks on top of peripheral banks – who had been expected to largely take the maximum possible – was the determining factor in increasing the uptake, according to analysts.

“The latest round of TLTRO could not simply being used as a funding source, but is also an excellent opportunity to enhance profitability,” said Joost Beaumont, senior fixed income strategist, ABN Amro.

Noting that the temporary easings of ECB collateral rules also ensured sufficient collateral availability for substantial TLTRO III use, Maureen Schuller, head of financials research, ING, highlighted that this month’s operation is the only one that offers banks the most favourable rate of -1% (between June 2020 and June 2021) in the event that they meet the 13m 0% lending benchmark.

The cheap liquidity provided by the ECB’s operations had already led to analysts lowering their covered bond supply forecasts for the year and yesterday’s numbers only reinforced such thinking.

“The huge drawings are in our view a definite supply negative,” said Schuller, “and as such, if any, spread positive for covered bonds.”

Crédit Agricole analysts said the take-up was in line with their expectations and therefore does not change their outlook for issuance, noting that covered bonds “have the edge” when it comes to duration. Five euro benchmarks from Eurozone issuers were launched this week, with maturities ranging from five to 15 years, whereas the last TLTRO III matures in early 2024.

“We do not believe that issuance volumes will collapse between now and year-end on the back of this [the TLTRO III take-up],” said the analysts. “Weeks such as the current one will likely remain the exception rather than the norm.

“However, having reached €65bn of euro benchmark funding for the year, we stick to our €115bn-€120bn forecast for the full year. Issuers will continue to utilise covered bond markets for tenors of five years and beyond.”