back CBPP3 - entering the exit

It has been almost four years since the ECB launched its asset purchases with the CBPP3. Now net purchases are gradually coming to an end: In September Draghi confirmed the anticipated 50% cut from October; from 2019 onwards only the redemptions should be reinvested. Will the central bank's buying strategy in the covered bond market change against this backdrop?

Author: Ted Packmohr, Head of Financials & Covered Bond Research

What does the halving of net purchases in October mean for the CBPP3?

From the outset, the ECB has granted itself greater flexibility in handling the CBPP3 and less transparency than with the PSPP or the CSPP. This provides it with greater freedom to respond to market developments. This is reflected, among other things, in the fact that in the past the level of monthly covered bond purchases was driven only to a limited extent by the overall APP target.

For example, although the central bank raised its monthly purchase target by a third from €60bn to €80bn in the spring of 2016, CBPP3 purchases fell by about half on average at that time. And in 2018, when the total APP was halved from €60bn per month to €30bn, average net CBPP3 purchases shrank by much less. It can therefore be said that the purchase volumes of the CBPP3 do not follow an automatic pattern. On the one hand, this is to be welcomed, as it enables the ECB to act more market friendly. On the other hand, it makes it more difficult to forecast the future development of the programme: It cannot be immediately concluded that by reducing its monthly net purchases from € 30 bn to only € 15 bn from October, the ECB will also necessarily halve the intensity of its covered bond purchases. Instead, our focus of analysis is on the two main pillars of CBPP3 activity: primary market supply and secondary market depth...

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