Extensions to ECB measures announced yesterday (Thursday), including a €500bn PEPP boost and additional attractive TLTRO III tranches, were broadly in line with expectations and are hence likely to have limited impact on 2021 covered bond dynamics, according to analysts and bankers.

Following its latest governing council meeting and last of 2020, the European Central Bank announced a €500bn expansion of the Pandemic Emergency Purchase Programme (PEPP), increasing its volume to €1.85tn and extending it by nine months until at least the end of March 2022 or “until it judges that the coronavirus crisis phase is over”. Reinvestments under the programme will be carried out until at least the end of 2023, an extension of 12 months.

Given that from August to November covered bonds did not account for any net PEPP purchases, the €500bn increase will not materially impact the Eurosystem’s buying of the asset class, according to analysts, who continue to expect the programme to be reserved almost exclusively for public sector securities.

“It was pretty much a non-event,” one analyst told The CBR, “as they essentially announced what everyone was expecting.”

A syndicate banker was similarly unphased by the announcements and said both the €500bn stimulus boost and TLTRO III amendments had been already priced in by the market.

“The forecasts we’ve already seen have taken into consideration the expansion of TLTRO,” she said, “so really, there were no surprises on that front.”

APP will continue to run unchanged at a pace of €20bn per month and, according to NordLB analysts, this should result in €2bn of monthly CBPP3 purchases, i.e. around 10% of the programme’s purchases. In combination with CBPP3 reinvestments – some €33bn will mature in 2021 – the ECB will have “a decisive influence” on demand for the asset class, they said.

“In our view,” they said, “the announcements by the monetary policymakers clearly show that the ECB will continue to leave its mark on the covered bond segment over the next 12 months, as it did in 2020.”

The ECB is adding three TLTRO III tranches between June and December 2021, ensuring funding until the end of 2024, and extending the favourable minus 1% lending rate by another year until June 2022. It also raised the volume banks can borrow in the operations from 50% to 55% of their stock of eligible loans.

The expansion and extension of the TLTRO III operations will increase the attractiveness of raising central bank liquidity for a further 12 months and therefore negatively impact 2021 euro benchmark supply, said NordLB’s analysts.

Although they maintained their €105bn forecast for next year, noting they had anticipated such ECB measures, ING analysts reduced theirs by €15bn, from €110bn to €95bn. They said the package of revised TLTRO III measures will together act as a limit for funding-driven bank bond supply all next year and well into 2022.

“The abundant amount of liquidity available at banks will, in our view, remain constructive to the performance of bank bonds in the first half of 2021,” they added.

Still no PEPP covered, CBPP3 resumes growth in November

The latest bi-monthly breakdown of PEPP purchases released on Monday meanwhile showed that covered bonds did not contribute at all to the net increase in PEPP in October and November, a trend witnessed since August, with the bias of Eurosystem purchases once again massively towards public sector securities.

The Eurosystem purchased a net €140.160bn of public sector securities under the programme in October and November. The only other asset class in which the Eurosystem recorded a net increase over the two months was corporate bonds, €342m, while commercial paper (CP) holdings fell €7.682bn, and no change in PEPP holdings of asset-back securities or covered bonds was recorded.

The lack of any covered bond contribution to the October and November net increase in PEPP is a continuation of the asset class’s absence in the August-September period, which came after it contributed 0.9% and then 0.5% over the previous two month periods from the programme’s start on 26 March until the end of July. Corporate bonds’ and CP’s contributions to PEPP’s growth have also continued to progressively decline.

ING analysts said the continued lack of covered bond buying under PEPP confirmed the programme to be “hardly relevant for covered bonds from a direct purchase angle”.

“Corporate purchases under PEPP were insignificant, at just €342m for October and November,” they added. “PEPP now has almost a full concentration on public sector purchases, while CSPP remains very active and supportive.”

The Eurosystem made €646m of net purchases under CBPP3 last month, with the portfolio growing from €285.811bn at the end of October to €286.458bn at the end of November, according to the latest ECB monthly reporting.

The ECB also revised some October APP numbers, including those related to CBPP3. The month-end figure was lowered from €285.864bn to €285.811bn, and the volume of redemptions in October was revised down, from €7.111bn to €6.218bn. This means holdings shrank even more than previously reported, by €1.041bn rather than €989m, with it remaining the month with the most redemptions under the programme and the first during an active phase of CBPP3 in which the portfolio shrank. Based on the revised figures, October gross purchases were €5.177bn, lower than the initially indicated €6.122bn.

The ECB told The CBR it could not provide any details on the reasons for the adjustments.

While November marked a return to growth for the portfolio, the €646m net increase is the third lowest of the year, with only August, at €500m, having a lower positive figure. Gross purchases in November were €4.719bn given redemptions of €4.073bn.

In the week to last Friday, settled and outstanding purchases under CBPP3 increased €436m, as the portfolio increased from €286.381bn to €286.817bn.

Given redemptions of around €300m last week, gross purchases came in at €736m. This is the lowest weekly gross purchases figure since the week ending 28 August and €598m below the €1.334bn weekly average from the first week of September until the week before last.

No CBPP3-eligible supply settled last week, with the primary market winding down in the run up to the seasonal holidays.