While the ECB's first covered bond purchase programme, worth €60bn, spread purchases more or less evenly over its lifespan, the second iteration of the scheme has been positively frugal.
Dividing the €40bn that it has at its disposal by the number of trading days it has in which to spend it, CBPP2 has daily average firepower of around €160m. On that basis. it should have bought €1.3bn by now — and should aim to buy €5bn by the end of the year. As of Tuesday morning its purchases totalled €759m.
The reasons for the paltry sum are understandable. There is very little it can buy. Aside from a €1bn dual tranche tap from Crédit Mutuel Arkéa two weeks ago, there have been no primary transactions that qualify for CBPP2 support. Instead the UK, Australia, and Norway have all pushed through benchmark trades, in part because of their distance from the eurozone.
This leaves the purchase programme with the secondary market, where high spreads are one factor preventing primary activity. Issuers do not want to pay the requisite amount to ensure execution, and so pushing down secondary spreads might be expected to support new supply.
There are, however, several reasons why secondary purchases will be completely ineffective. First, covered bond spreads in the jurisdictions most in need of funding are well inside the sovereign curve. In Italy, Spain and to some extent France, even if investors suddenly become amenable to taking on new risk, they are unlikely to buy Cédulas, OBG or Obligations à l’Habitat trading through government bonds.
Pushing down covered bond spreads would simply exacerbate this problem. But this doesn’t matter because the ECB would be unable to move secondary spreads anyway in the current environment. Covered bonds have outperformed govvies only because the entire market is illiquid.
The market has watched French 10 year OATs reach 200bp over Bunds, and five year EFSF paper trade at record high spreads of 100bp over mid-swaps. The sovereign crisis is seeping into Finland, Holland and Austria. This situation is unlikely to be helped by the ECB buying small chunks of outstanding Italian covered bonds at spreads so high their notation requires a comma.
Pick your metaphor. The ECB is fighting a forest fire with a garden hose, it has brought a knife to a gunfight, and is trying to cure a potentially fatal condition with a couple of ibuprofen.
Unless the ECB eventually decides to intervene without limit in the sovereign market, its covered bond purchase programme will be nothing more than a vehicle allowing investors a cheap way out of unwanted positions.