A €600bn increase to PEPP announced by the ECB yesterday (Thursday) is expected to support the positive tone in credit markets, but after the minor role of covered bonds in the programme thus far was revealed on Tuesday, little specific impact on covered bonds spreads or issuance is anticipated.

After its latest governing council meeting, the European Central Bank announced the €750bn Pandemic Emergency Purchase Programme (PEPP) would be boosted by an additional €600bn and prolonged from year-end until at least the end of June 2021, with redemptions reinvested until at least the end of 2022.

Most analysts had been anticipating an increase, but the €600bn figure was higher than expected, and credit markets rallied on in the wake of the announcement.

However, after the ECB released the first breakdown of PEPP purchases on Tuesday showing covered bonds to have only constituted 0.9% of net purchases, analysts generally downplayed any specific impact of the €600bn increase on purchases of covered bonds.

“We find it hard to believe the ECB will change this strategy in the months to come,” said ING head of financials research Maureen Schuller, noting how PEPP’s firepower had been directed at government bonds.

“Not only does the central bank already hold 41% of the Eurozone eligible benchmark covered bond debt outstanding,” she added, “the effectiveness of a stronger private sector purchase focus, particularly via the CBPP3, would also be doubtful at best considering the Covid-19 crisis and its impact on sovereign debt levels.”

She further noted that little more than 1% of the €120bn additional envelope announced for the asset purchase programme (APP) ahead of PEPP seems to have been targeted at covered bonds.

Analysts cited the lack of supply as contributing to the low Eurosystem buying of covered bonds and focus on the secondary market, but noted this situation could be changed by any significant pick-up in issuance, even if this is not widely expected (as discussed below).

“If the primary market for covered bonds were to regain momentum, the higher ceiling would automatically give the ECB more leeway to engage in covered bond transactions,” said Karsten Rühlmann, senior investment analyst, LBBW.

CBPP3 is meanwhile expected to at a minimum keep a lid on spreads and potentially still push levels tighter.

“Covered bond spreads will be supported by ongoing CBPP3 purchases, which have so far accounted for c.10% of net APP purchases (i.e. QE excluding the PEPP),” said Sverre Holbek, senior analyst at Danske Bank. “Given that we expect supply to remain relatively limited and noting also the significant redemptions lurking ahead this month, we expect spreads to continue their tightening trend in the near term.”

Syndicate bankers said that although conditions are as such set to remain conducive to issuance, they do not necessarily expect covered bonds to be the “weapon of choice”, in the words of one.

“We’ve come a long way very quickly in every asset class,” he said. “If you’re a bank, you might take advantage of this window to get capital on board rather than go with covered bonds for general liquidity.”

Another syndicate banker said the market’s mood is that “the crisis is over” despite a plethora of negative headlines globally.

“We’re facing comparably high redemptions in the coming months,” he added, “there’s not much supply, and the market is being driven by cheap cash, so that’s the view right now.

“From an issuer’s perspective, if you are not forced to enter the market, just lay back, enjoy your home office time, and wait – funding is getting cheaper day by day.”