Regarding the ABS (ABSPP) and covered bonds purchase programs (CBPP3) and contrary to markets‘ expectations, the ECB did not communicate the initial size of purchases…..
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The programs will be spread over two years and will commence with covered bonds purchases in mid-October, while ABS purchases are due to start later.
The ECB confirmed that, it will buy both senior and guaranteed mezzanine tranches of traditional ABS, with a rating equivalent to BBB- or higher, either outstanding or new issues.
The ABSPP contribution to the alleged 1 trillion euros expansion of the ECB’s balance sheet, rests on the day-by-day management of purchases.
At its Naples meeting, the ECB re-affirmed “the GC is unanimous in its commitment to use additional unconventional measures within its mandate, should the recovery prove weaker”than assumed in its September growth and inflation projections. The ECB acknowledged the weaker than expected confidence surveys data and core inflation figures and that the conditions for a gradual recovery of the Euro area economy in 2015 need to be closely monitored. Yet, Draghi stressed in more than one occasion during the press conference that the ECB has been quite active with the June and September measures and that it will at least take a long pause before stepping into more unconventional action. Draghi reaffirmed that the size of the ECB’s balance sheet is expected to increase by roughly a trillion, which may suggest the ECB will be quite proactive with asset purchases going forward. Yet, during the press conference Draghi also indicated that the balance sheet expansion is only an instrument and not an objective per se and refuted the suggestion the ECB may step up ABS purchases should the take up at the December TLTROs be disappointing again. He rather suggested the size of the purchases will be geared to the dynamics of medium-term inflation expectations.
The details of the ABSPP and CBPP3 program1 indicate the purchases will be spread over two years at least. The ECB will get going with covered bonds in the second half of October and will start buying ABS only later in Q4. Contrary to markets expectations, the ECB opted not to disclose any information on initial program size both for covered bonds and ABS. For fully retained ABS (roughly 50% of the total) the purchases will be conditional to the participation of other market agents, which suggest that the purchases may be slow. The ECB will buy on the primary and secondary market senior and mezzanine tranches of euro denominated traditional ABS (the total outstanding is just under 1 trillion euro according to ECB data for June 2014) with a second best credit assessment of the equivalent of BBB-. The ECB will not buy more than 70% of each ISIN code. The statement seems to indicate that the purchases of mezzaninetranches will commence at a later stage as the ECB still needs to finalize the eligibility criteria.
Like for ABS, covered bonds can be targeted for purchases only if they are eligible in the ECB monetary policy operations and if they are denominated in euro and settled in the euro area and have an underlying asset that includes exposure to either private or public entities. Purchases will include Cyprus and Greece, but with limitations.
The impression is that the ECB intentionally kept program details vague as it is moving into a terra incognita. Thus, it will very much depend on day-by-day management whether the program will be effective in engineering a sizeable expansion of ECB’s balance sheet and foster the development of a secondary market for ABS junior tranches and re-activate monetary policy transmission. One thing is certain: the ECB is not in a hurry to expand its balance sheet as fast as the Fed did in 2013 when it bought just under 1 trillion of Treasuries in 12 months. We continue to assign a below 50% probability to a QE being announced in the euro area, yet the probability is rising as data continue to surprise on the downside, Should the recent weakening trend be confirmed, the ECB will be left with no further option but to extend its purchases. Yet, we doubt this will happen before the next Spring.
Source: BONDWorld.ch
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