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CBPP 3 – first progress report

04 November 2014
Richard Kemmish

Two weeks into the ECB’s covered bond purchase programme and boy have they been busy. No one expected that they would get to nearly €5bn this quickly. But to put that number into perspective, at this rate they will have bought the other €495bn as early as spring 2019.

Its easy to score quick bonds – it doesn’t take long to mop up the inventory at the investment banks, particularly as dealers are increasingly looking to go flat as year end looms (and bonuses have been set). But €5bn will have cleared up most of the inventory on the street already (remember the good old days when some German trading desks held that much in pfandbriefe alone?), so unless we see some fairly aggressive new issue activity (which we won’t) that run rate is going to slow down quite rapidly.

But after two weeks, what do we think of the programme already? Our friends at Credit Agricole have just published the results of an investor survey. Sadly the survey just confirmed what we always suspected, that investors answer surveys based on their own interests defined on a short time horizon.
Whereas overall investors were more positive about the programme than, for example DCM bankers and journalists, there were two great divides: bank treasurers were the most negative about the programme whilst investors in the periphery were the most positive.

That bank treasurers dislike the programme whilst asset managers like it simply reflects their current holdings relative to aspirations. Setting aside covered bond only funds, I’ve heard from a couple of asset managers recently that their more general funds are longer covered bonds than they would like to be. They’ve enjoyed the rally but don’t see much upside and would like to switch to something a bit higher yielding now. By providing one last push to the rally and unlimited demand at these levels the ECB has created perfect conditions for an orderly exit. Thank you very much Mario. 

Bank treasurers, on the other hand, were eagerly seeking bonds to fill their liquidity buffers. Given the relative haircuts of covereds and govvies in the recently published rules, the economics of holding the two asset classes is relatively similar for many bank treasurers. The more the covered bond spreads rally, the less benefit in switching out of government bonds.

Much the same could be said of other ‘technical’ reasons to buy covered bonds – collateral for clearing houses, CSA agreements on swaps, etc. With technical buying so important the ECB’s squeeze on covered bond spreads is effectively sovereign bond QE by proxy.

The other perception divide core:periphery is even more obvious. Periphery spreads have further to rally and peripheral issuers have the most untapped issue capacity, so investors naturally longer those bonds are more grateful.

And, far more importantly being resident in those countries they are more acutely aware of the reason that we need QE, something easy to miss from Frankfurt.

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