The CBPP3 portfolio contracted some €1.318bn last week, one of the biggest decreases since the programme was reactivated in November 2019, on the back of a surge in redemptions. Anticipated ECB monetary policy updates next week are not expected to affect covered bond buying.

According to data released by the European Central Bank relating to settled and outstanding purchases under its various programmes on Monday, the CBPP3 portfolio decreased €1.318bn, from €287.699bn to €286.381bn, in the week to last Friday.

Gross purchases of €1.482bn were only €82m lower than the previous week’s €1.564bn, but redemptions of around €2.8bn, disclosed yesterday (Tuesday) afternoon, were the joint highest this year, equalled only by redemptions in the week ending 30 October.

The only euro benchmark to settle was a Rabobank €1bn 20 year transaction, of which central banks and official institutions were allocated €430m. An Oma Savings Bank €250m seven year sub-benchmark also settled last week.

The APP portfolio last week contracted for the first time since the end of July, by €932m, on the back of around €15.6bn of redemptions – the highest this year. Gross purchases were €14.668bn, up €1.111bn from €13.557bn the previous week.

PEPP grew €15.681bn last week, versus €19.185bn the previous week, with gross purchases coming in at €17.781bn. Aggregate gross APP and PEPP purchases of €32.449bn were down €1.493bn from €33.942bn the previous week.

On Thursday of next week (10 December), the ECB is widely expected to announce an expansion of PEPP after the latest governing council meeting and a further easing of TLTROs. Analysts expect an additional €300bn-€500bn to be earmarked for PEPP.

A syndicate banker said he expects “more of the same” to be announced by the ECB next week in order to reassure markets, but that any updated measures are unlikely to represent a game-changer.

“They are definitely not going to tell the market they are going to reconsider what they’ve been doing for so long,” he said.

One analyst told The CBR that any increase to the PEPP programme will be a “non-event” for covered bonds as it is very unlikely to lead to higher Eurosystem purchases.

“Whatever they do is obviously going to help the European Union and euro government bond issuers,” he said, “but on the covered side, I don’t see it being a meaningful driver for additional purchases.

“The real question is whether they’ll announce more TLTROs,” he said, “or reduce the costs of the existing ones.”

Joost Beaumont, senior fixed income strategist, ABN Amro, said that after the Eurosystem’s net purchases of around €24bn of covered bonds this year further squeezed a euro benchmark market facing a negative €23bn of net supply, the picture will not change much next year.

“We estimate €110bn of supply of euro benchmark covered bonds in 2021, while redemptions equalling €132bn will redeem and we pencil in €20bn of net covered bond purchases by the Eurosystem,” he said. “As a result, net adjusted supply will be around €42bn negative next year.”