ECB unveils CBPP3 alongside ABS buying, but few details

The European Central Bank (ECB) announced a new covered bond purchase programme (CBPP) to be launched alongside a first ABS purchase programme in October this (Thursday) afternoon — the latter move having been anticipated, although covered bonds had not been in focus.

Preparations for an ABS purchase programme were revealed on 5 June, but covered bonds were not discussed by the ECB in the context of any purchase programme.

“In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme,” said ECB president Mario Draghi, announcing CBPP3 alongside the ABS programme.

The ECB has launched two previous covered bond programmes. The latest (CBPP2) ran from November 2011 until October 2012, with the central bank dramatically undershooting the programme’s potential Eu40bn, as only Eu16bn of covered bonds were bought. The first programme (CBPP1) ran from July 2009 to June 2010 and the full Eu60bn earmarked was spent.

CBPP1 was credited with helping the recovery of the asset class after the post-Lehman financial crisis, while the underspend on CBPP2 was considered understandable in a context of lower needs.

As rumours of a CBPP3 emerged this morning, a covered bond analyst said that a new programme would make limited sense in light of how CBPP2 developed and the high negative net supply the market already faces, and Florian Eichert, senior covered bond analyst at Crédit Agricole CIB, echoed this view.

“Obviously we don’t know the specific details at the moment,” he said, “but what we can say is that it will squeeze the market even more and could hit liquidity in both primary and secondary markets.”

More details are due after the next ECB meeting, on 2 October.