The window for issuers to benefit from CBPP3 orders for new issues could shut in less than three weeks, after the European Central Bank yesterday (Thursday) set out the modalities for the “partial reinvestment” phase of APP, although analysts noted ambiguity in the statement’s wording.

From the beginning of March until the end of June, the central bank is reducing the asset purchase programme (APP) by €15bn per month by the only partial reinvestment of maturing securities. These will be allocated proportionately to the share of the constituent APP programmes – the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3), and the corporate sector purchase programme (CSPP), the ECB said yesterday.

“During the period of partial reinvestment, the Eurosystem will retain the existing smooth reinvestment approach,” it added.

For its private sector programmes (ABSPP, CBPP3, CSPP), “primary market purchases will be phased out by the start of the partial reinvestments in order to better steer the amount of the purchases conducted under each programme” – with the exception of non-bank corporates being sought for the green tilt of CSPP.

Issuers already front-loaded issuance plans this year – contributing to the second-biggest January for euro benchmark supply – partly in order to beat an anticipated reduction in the Eurosystem order for new issues from 20%, although market participants tended to expect a cut to 10% at the beginning of March (with the outside chance of such a reduction at the start of February).

Following the ECB’s announcement, analysts now believe the cut could be greater, and raises the possibility of the Eurosystem leaving the primary market completely as early as the end of February – although the statement’s wording left room for interpretation. DZ covered bond analyst Jörg Homey, for example, said that he expects the CBPP3 order to amount to no more than 10% in March, and possibly even less, noting that 0% should not be ruled out.

Joost Beaumont, head of bank research at ABN Amro, is among those expecting the Eurosystem to stop buying covered bonds for primary market issues that have a settlement date in March, although he said it could at best buy around 5% of new issues.

“The fact that demand for covered bonds has strengthened somewhat in January will probably comfort the Eurosystem that its exit from the primary market will go smoothly,” he said.

“If the Eurosystem were to leave the primary market in March, we expect that this will have a widening impact on spreads, as issuers will need to pay higher new issue premiums to find new investors to fill the gap that the central bank leaves behind,” added Beaumont, noting that in the past, spreads widened around 5bp-10bp following reductions in the Eurosystem order size.

Several market participants said issuers could bring forward new issue projects into February to benefit from the current 20% order. Maureen Schuller, head of financials sector strategy at ING, noted that €6bn is set to be reinvested by the Eurosystem, with the primary market still able to contribute to this.

Should the Eurosystem follow its usual practice of applying the modalities according to settlement date, and cease primary market purchases for issuance that settles from 1 March, the last feasible issuance date to benefit from a CBPP3 primary order could be Thursday, 23 February – Deutsche Bank in June 2022 used T+3 settlement to beat a previous anticipated Eurosystem order reduction, but longer settlement periods are typically used. This would leave a window of less than three weeks for issuers seeking a final CBPP3 boost.

The ECB’s announcement comes in the first week of the year to see no euro benchmark covered bond issuance. A €250m five year mortgage Pfandbrief for Sparkasse Hannover was the only public issuance of note and first CBPP3-eligible deal settling in February to hit the market, confirming the continuation of the ECB’s prevailing 20% order.

Christine Lagarde photo credit: Adrian Petty/ECB