Covered bonds did not contribute at all to the net increase in PEPP in August and September, as the Eurosystem continued to steer it almost exclusively towards public sector securities. Meanwhile, redemptions held back CBPP3 growth last month despite the highest gross purchases since March.

According to bi-monthly data relating to the Pandemic Emergency Purchase Programme released by the European Central Bank on Monday, public sector securities purchases under PEPP increased a net €126.832bn in August and September, greater even than the net €126.774bn overall increase in PEPP, before a quarter-end amortisation adjustment is taken into account. Aside from the net increase in public sector securities purchases, the Eurosystem recorded a net increase only in corporate bonds, of €2.707bn, while commercial paper holdings fell €2.765bn, and no change in its holdings of asset-back securities or covered bonds.

“This should probably not come as too big a surprise given that the share of covered bond purchases had been limited to 0.7% in the March-July period.” said Joost Beaumont, senior fixed income strategist, ABN Amro.

“In fact, almost all purchases under the PEPP were public sector debt, which also makes sense as the conditions attached to these are much more limited than within the APP, while the amount of new supply of public sector debt has also risen sharply this year.”

Covered bonds’ 0% share of the net August and September PEPP increase is down from a 0.5% contribution for the June-July period, and a 0.9% contribution covering activity from the programme’s start on 26 March until the end of May. Corporate bonds’ and CP’s contributions to PEPP’s growth have also progressively declined.

The Eurosystem made €2.839bn of net purchases under CBPP3 in September, but taking into account a quarter-end amortisation adjustment of €451m, the value of CBPP3 holdings rose €2.388bn, from €284.464bn at the end of August to €286.852bn at the end of September.

The €2.839bn net increase is the highest since May, but still €824m lower than a €3.663bn average monthly net purchase seen from January-May, before the figure fell consistently below €2bn as activity decreased into the summer.

Gross purchases were €6.286bn in September, €4.165bn higher than in August and the highest since March, but CBPP3 portfolio growth was held back by €3.447bn of redemptions.

The rise in gross purchases came alongside a sharp increase in the volume of CBPP3-eligible supply settling – €8.6bn in September versus just €500m the previous month.

Maureen Schuller, head of financial sector strategy, ING, highlighted that despite a relatively high volume of eligible settlements, CBPP3’s primary holdings only increased €730m last month, with the remaining net €1.658bn being bought in the secondary market.

“The relatively low share of net primary purchases versus eligible settlements can, in our view, mostly be explained by last month’s redemptions,” she said, “and by the increase in non-CBPP3 related primary demand.”

Reduced primary market activity due to the coronavirus pandemic and related TLTRO-III drawings has resulted in higher oversubscription levels for covered bonds, added Schuller, from a bid-to-cover ratio of around 2.3 until mid-March to 3.4 after the summer period, leading to lower allocations to the Eurosystem.