Covered bond net purchases under PEPP fell to just €1.031bn across June and July, constituting only 0.5% of the overall portfolio increase, as the Eurosystem increasingly focused on public sector securities. CBPP3 and overall APP and PEPP buying meanwhile hit seasonal lows.

According to data released by the European Central Bank on Monday, public sector securities constituted €198.214bn (96.3%) of total net PEPP purchases of €205.744bn in June and July, corporate bonds €7.043bn (3.4%), and covered bonds just €1.031bn (0.5%) – no asset-backed securities (ABS) were purchased, while commercial paper holdings fell €538m. An end-June €352m quarter-end amortisation adjustment and redemption of coupon strips meant that PEPP holdings as of last Friday (31 July) were €440.057bn.

Public sector securities’ share grew to 96.3% from 79.5% in the first bi-monthly report – which covered activity from the launch from PEPP’s start on 26 March to the end of May – while the biggest fall was in CP’s share, with the contraction of such holdings contrasting with a previous 15% contribution.

Covered bonds’ 0.5% share of the net June and July PEPP increase is down on a 0.9% (€2.099bn) contribution in the prior period.

An SSA and covered bond analyst said covered bonds are clearly a residual part of the programme, and that the ECB can apparently be flexible in its purchasing allocation, as indicated by the higher share (96%) allocated to PSPP.

“The point is there is no real limit,” he said. “They could buy 100% PSPP in PEPP if they wanted to.

“It’s basically a covered bond non-event,” he added, “and it shows that you don’t need PEPP to support spreads at the moment.”

However, another covered bond analyst noted that while the decrease in purchases over the two month period represents a significant decline, it is still a notable addition to overall Eurosystem covered bond purchases.

“It’s effectively down from €1bn to €0.5bn a month, on average,” he added, “but in such an illiquid market, this still makes quite an impact, even if it is still a drop in the ocean of PEPP.”

In July, the APP increased a net €21.578bn, with PSPP contributing €16.370bn (75.7%), the corporate sector purchase programme (CSPP) €4.052bn (20.8%), and CBPP3 €1.198bn (5.5%) – ABSPP holdings fell €492m. CBPP3’s €1.198bn is the second lowest monthly increase since new net purchases under the programme resumed in November 2019, with only December having been lower.

The PEPP portfolio grew a net €85.432bn in July, which is the lowest net increase for a full month of purchases. Combined with the APP increase, Eurosystem net purchases totalled €107.001bn, which is also the lowest monthly increase since PEPP purchases began.

“It’s quite low,” said an analyst, “but it’s within the seasonal fluctuation so it is to be expected.”

ECB executive board member Isabel Schnabel (pictured) noted this last month, highlighting that there is typically less activity in both primary and secondary markets during summertime.

“That’s one reason why the monthly volume of purchases may drop,” she said.

In the week to last Friday, settled and outstanding purchases under CBPP3 decreased €618m, as the portfolio shrank from €284.582bn to €283.964bn. This is the second consecutive week CBPP3 holdings have fallen, as the previous week saw the portfolio contract by €637m – redemptions amounted to €1.3bn last week and €1.4bn the previous week.

Gross purchases came in at €682m, down €81m from €763m the previous week. This is the lowest weekly gross purchase figure since the week ending 1 May and €421m below the €1.103bn weekly average from the time PEPP was launched until the week before last.

For the third consecutive week, no CBPP3-eligible supply settled amid the seasonal lull in primary market activity.

Aggregate gross APP and PEPP purchases of €27.044bn for the week are the lowest since PEPP purchases began in late March.

The APP portfolio shrank €2.432bn, as redemptions swelled to €10.8bn, with gross purchases of around €8.368bn, while PEPP grew €17.476bn, with redemptions of €1.2bn and gross purchases of €18.676bn. Last week’s gross PEPP purchases are the lowest since the programme was launched.

Within the APP, only the CSPP component experienced a net increase, of just €7m.

“Overall, the ECB seems to be loosening its grasp, as last week saw all other programmes under APP in negative net purchases,” said ING analysts.

Photo: ECB/Flickr