The CBPP3 portfolio in October registered its first ever monthly contraction during an active phase of the asset purchase programme, shrinking €989m on the back of record redemptions and modest eligible supply, with the Eurosystem turning to the secondary market for the bulk of its purchases.

The portfolio contracted €989m, from €286.852bn at the end of September to €285.864bn at the end of October, according to figures released to the ECB on Monday relating to purchases executed last month. The €989m decrease compares with a €2.388bn increase in September, and, excluding the period from January to September 2019 when the Eurosystem was not making new net purchases, it is the first month in which the portfolio has shrunk, rather than increased, in the programme’s six year history.

Gross purchases were €6.122bn, only slightly less than September’s €6.286bn, and the portfolio decrease was principally due to €7.111bn of redemptions in October, the highest monthly redemptions ever registered for the programme.

According to figures released yesterday (Tuesday) relating to settled and outstanding purchases, last week saw around €2.8bn of CBPP3 redemptions, the highest for a week since net new purchases resumed under the programme in November 2019. With gross purchases at €1.263bn, the CBPP3 portfolio hence contracted some €1.537bn, from €287.426bn to €285.889bn – the largest weekly decrease in the history of CBPP3, even including the nine month period pause in 2019.

Analysts said that on top of the record redemptions, the Eurosystem has been hampered by a lack of new issuance.

“October was just another confirmation of the poor primary activity in covered bonds this year,” said Maureen Schuller, head of financials sector strategy, ING.

She noted that after Eurozone banks attracted another €174bn (or €158bn net) under the TLTRO-III operations in September, covered bonds last month experienced their second slowest month of October of the past decade, with only €7.6bn in euro benchmark debt issued.

Given the modest level of supply, the majority of purchases were made in the secondary market, and Alex Constanze Steinmann, analyst, DZ Bank, noted that the ECB’s redemption projection figures for almost all months until October 2021 have been revised upwards slightly.

“This shows that in October the ECB also bought bonds with a maturity of less than one year for CBPP3 on the secondary market,” he said. “The average purchase volume per trading day remained at a high level last week, at well over €300m.”

Last Thursday the ECB strongly indicated that in December it will increase its QE measures in response to the second coronavirus wave in Europe.

Bernd Volk, head of covered bond research at Deutsche Bank, said that given likely further easing of TLTRO conditions in December, euro benchmark supply is unlikely to increase.

ABN Amro analysts forecast that monthly APP purchases will be increased from the current monthly rate of €20bn.

“By increasing the APP,” they said, “the ECB may have the intention of signaling the longevity of significant asset purchases long after the PEPP ends given downside risks to inflation.”

Aggregate net Eurosystem purchases in October were €87.450bn, the second lowest monthly amount since PEPP purchases began in March. Net APP purchases were €25.465bn, down €1.18bn from €26.645bn in September, while net PEPP purchases were €61.985bn, down €5.323bn from €67.308bn.

Last week, PEPP grew €10.77bn, versus €16.264bn the previous week, with gross purchases coming in at €12.970bn – the lowest weekly gross purchases since the programme was launched.