In August the CBPP3 portfolio grew less than in any other month in which the Eurosystem has been making new net purchases, with the summer lull helping limit the net increase to €500m. A pick-up in activity is anticipated, but will come against a backdrop of high redemptions.

The Eurosystem made €500m of net purchases of covered bonds last month, as the CBPP3 portfolio increased from €283.964bn at the end of July to €284.464bn at the end of August, according to monthly figures released by the European Central Bank on Monday. The €491m increase is less than half the €1.198bn increase of July and, excluding the period from January to September 2019 when the Eurosystem was not making new net purchases, is the lowest monthly amount recorded in the history of CBPP3.

While August has typically seen reduced purchases versus other months due to the summer lull, the €500m of net purchases for last month compares with €1.198bn for the same month in 2018, €2.686bn in 2017, and an average of €3.712bn from 2014 to 2018.

In part, the record low reflects an extended period of market inactivity, as no CBPP3-eligible supply settled in August. In 2018 €1.75bn of CBPP3-eligible supply settled in August, and in 2017 €2bn.

The final week of August also saw around €1.6bn of redemptions, the second highest amount since net new purchases resumed under the programme in November 2019. In the week ending 28 August, the CBPP3 portfolio contracted some €1.235bn, with gross purchases at €365m, the lowest since the week ending 8 May.

With the exception of the week ending 20 September in 2019 when the Eurosystem was not engaged in net new purchases and the portfolio shrank by €1.484bn, the €1.235bn weekly decrease from €285.677bn to €284.442bn is the largest fall registered in the history of CBPP3.

PEPP net purchases in August were €59.466bn, down €29.957bn from €85.423bn in July and the lowest monthly amount since purchases began under the programme in March. Net APP purchases were €19.127bn, down €2.451bn from €21.578 in July and the lowest monthly amount since December 2019, bringing aggregate net Eurosystem purchases to €78.593bn.

Eurosystem purchases are expected to increase alongside greater market activity in the coming weeks, but this will come against a rise in redemptions, as Jörg Homey, covered bond analyst at DZ Bank, highlights: €3.4bn of CBPP3 redemptions are due in September, and €6.6bn and €5.5bn in October and November, respectively.

“We therefore expect the ECB to increase its purchases per trading day again,” he said. “Purchasable new issues would help it to stem the portfolio decline.”

Higher CBPP3 purchases will support covered bond spreads, he added, although the risks posed by a second wave of coronavirus cannot be ruled out in the autumn.

“The risk of higher new infections suggests a somewhat more cautious positioning,” he said. “We therefore consider limited setbacks of a few basis points (based on the swap spread of the iBoxx Euro Covered Index) not unlikely.”

In the first week of September, the CBPP3 portfolio grew €894m, from €284.442bn to €285.336bn. This is the biggest increase since the week ending 5 June and, given there were no redemptions last week, gross purchases were also €894m.

This is the highest weekly gross purchases since the week ending 10 July and €84m below the €978m weekly average from the time PEPP was launched in March until the week before last. Last week also saw the first CBPP3 eligible supply settle since the week ending 10 July, a €500m 10 year green covered bond from Berlin Hyp that was launched on August 25 and settled on September 2.

This week, €1.1bn of CBPP3-eligible supply has settled across two issues, a €500m deal from MünchenerHyp on Tuesday, and a €600m deal from BPCE SFH today (Thursday), making it likely the busiest week for the Eurosystem in the primary market since the week ending 3 July. Assuming there is no further issuance this week, only a €500m transaction from DZ Hyp will settle next week.

PEPP overall grew €14.318bn last week, versus €14.012bn the previous week, with gross purchases coming in at €15.181bn.

Gross APP purchases were €11.170bn, up €7.276bn from €3.894bn the previous week, and the highest weekly gross purchases since the week ending 10 July, bringing aggregate purchases across the two programmes to €26.351bn. This is up €7.145bn from €19.206bn the previous week, and the first time since the week ending 5 June that aggregate purchases have increased.

Last week’s net APP increase of €2.570bn was up €576m from €1.994bn the previous week, while redemptions of around €8.6bn were less than half of €1.9bn the week prior.

Following the governing council meeting of the ECB today, the central bank left its monetary policy unchanged and published modest changes to its projections. ABN Amro analysts said that further policy easing is still likely in December, but that this will not include a cut in the deposit rate unless there is a significant further rise in the euro.

“We remain of the view that the ECB will ease policy again by the end of this year, most likely in December,” they said. “Our base case is for a €500bn increase in the PEPP envelope.”