A new European Central Bank covered bond purchase programme announced yesterday (Thursday) afternoon has been welcomed by market participants, but few expect a response as dramatic as that which greeted the first CBPP in 2009-2010, with spread reactions so far muted.

ECB president Jean-Claude Trichet confirmed speculation that a second CBPP would be announced at a press conference after a meeting of the central bank’s governing council. Full details of CBPP2, as Trichet dubbed it, will be released on 3 November, after the next governing council meeting, but he said that:

• Purchases will be for an intended amount of Eu40bn;
• Purchases will have the capacity to be conducted in the primary and secondary markets and will be carried out by means of direct purchases;
• Purchases will begin in November 2011 and are expected to be completed by the end of October 2012.

While the length of the programme, a year, is the same as that announced in May 2009, the Eu40bn size is two-thirds of the Eu60bn of CBPP1. The size was at the low end of many expectations, but some analysts suggested that the volume could be interpreted more encouragingly.

“In terms of outstanding volumes Eu40bn represents just 4% of the outstanding euro benchmark covered bond market,” said RBS analysts. “Even when narrowing this to solely UCITS compliant euro-area covered bonds this is still only 5%.

“However, if the ECB focuses on 3-10 year maturities of euro-denominated UCITS-compliant programmes from within euro-area countries, then Eu40bn is about 10% of the outstanding bonds. Taking into consideration the Eu60bn already bought in CBPP1, then the ECB could end up holding a 24% share of bonds fitting in this description.”

Governing Council of the European Central Bank

Market participants also suggested the impact of the Eu40bn could depend on what covered bonds will be bought.

Under CBPP1, national central banks were allocated shares of the Eu60bn proportional to how much capital they contribute to the ECB, meaning that larger countries received larger funds and could direct these towards their home markets. However, the ECB has not specified how CBPP2 will operate.

“Depending on the involvement of the respective national central banks, Spanish and Italian covered bonds, and potentially the less liquid Irish and Portuguese paper, too, could likely be the biggest beneficiaries of this announcement,” said Leef Dierks, head of covered bond and SSA strategy at Morgan Stanley. “What is more, depending on the upcoming purchases, elevated spread levels of individual French names could become subject to a pronounced contraction, too.”

Furthermore, the programme size could be adjusted if necessary, suggested Fritz Engelhard, German head of strategy at Barclays Capital.

“We would highlight that the ‘intended amount’ could be adjusted in case of need and also the respective NCBs of the euro system have the ability to support the covered bond market through their standard reserve management operations,” he said.

Bernd Volk, head of covered bond research at Deutsche Bank, meanwhile highlighted the symbolic impact of the ECB’s move.

“The renewed intervention of the ECB suggests ongoing central bank support for this product and more importantly indicates to protect it likely even further,” he said.

While the medium to longer term impact of the ECB’s actions were being discussed, syndicate officials were more bullish about the prospect of CBPP2’s announcement giving the primary market new impetus.

“The primary market will definitely reopen in grand fashion, probably Monday to allow us a day or two to see where spreads reset,” said Lorenz Altenburg, head of covered bond syndicate at Nomura.

Several issuers have roadshowed ahead of potential covered bond issues, and banks in general will be happy to see any opportunity to issue after covered bond issuance windows having been short and the senior unsecured market as good as shut. But some bankers said that different issuers could still see reasons to hold off.

“I believe spreads in the secondary market will have to tighten before we can see a wave of huge supply,” Vincent Hoarau, head of covered bond syndicate at Crédit Agricole. “Tier one issuers will not issue at current levels as they will be betting on spread tightening, while weaker issuer will wait for the start of the program to benefit from the bid of central banks in primary.”

However, a syndicate banker said that the secondary market’s performance so far suggested that hopes of tighter levels might be merely wishful thinking.

“One issuer told us that he would wait to see spreads going tighter,” he said, “but we’re not seeing secondary spreads improve. This is nevertheless the good news that they’ve been waiting for and there’s no reason to expect things to get much better, so there is no reason for them to hold off now.

Jez Walsh, global head of covered bond syndicate at RBS, said that he was not surprised that the market’s reaction had been muted.

“I’m not surprised we’re not seeing spreads move much,” he said. “There are bigger problems here. Generally speaking bank funding opportunities are tougher than they were when the first CBPP was launched, but in addition we now have the sovereign situation.

“And if you look at where covered trade, versus senior they have already massively outperformed.”

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