Market participants expect negligible disruption to the covered bond market from a complete end to CBPP3 buying, after the European Central Bank yesterday (Thursday) announced it expects to discontinue asset purchase programme reinvestments from July.

The ECB announced that it “expects to discontinue the reinvestments under the APP (asset purchase programme) as of July 2023”, after continuing to reduce APP holdings by an average of €15bn per month until then. The news accompanied a 25bp rate hike and was in line with recent expectations regarding the central bank’s overall stance.

“We’ve decided to expect the effectiveness of the [APP] decision as of July – saving a little bit of optionality just in case – simply because we have seen that the partial reinvestment that has been effective since March has actually run very smoothly and has been well-absorbed by markets,” said ECB president Christine Lagarde (pictured).

Indeed, covered bond market participants highlighted how well-functioning the market has proven since the ECB stopped primary market purchases under its third covered bond purchase programme (CBPP3) in February and against a backdrop of lower buying in the secondary market.

“I’m not really concerned about the ECB turning its back on covered bonds,” said one. “We just expect some minor spread widening up until the middle of the year.”

DZ Bank analysts cited the higher yields available on covered bonds as having both supported demand for new issues and the stability of covered bond spreads amid the recent market volatility induced by banking sector turmoil.

And although they noted that headline risks could increase risk premiums in the coming weeks, they expect the iBoxx Euro Covered index to return to its current level – around 20bp – on a three month horizon, with the potential for as much as 10bp of tightening over the coming year on the back of greater calm in the market and higher yields.

More “normal” issuance activity in the second half of the year than the €100bn-plus of euro benchmark supply year-to-date should make the ECB move more digestible, according to Commerzbank analysts, without any significant spread distortions.

NordLB analysts nevertheless expect the ECB’s withdrawal to reinforce greater spread differentiation across jurisdictions and issuers.

The only euro benchmark issue this week was a €500m six year Pfandbrief for Sparkasse Pforzheim Calw on Wednesday. Leads Commerzbank, DekaBank and Helaba priced the new issue at 11bp over mid-swaps, 3bp tighter than initial guidance on the back of a final book of some €840m and with the new issue premium put at around 3bp.

Photo credit: Angela Morant/ECB