The insidious impact of CBPP3

By Bill Thornhill
13 Nov 2014

The European Central Bank's covered bond purchase programme is lowering funding costs but its price distorting effect is slowly but surely crowding out private demand. Recent deals from BNP Paribas and BPCE attracted less than 50 investors, when usually they would have attracted closer to 100. Central bank participation in primary books has more than doubled to 40% and, as bonds tighten further in the secondary market, private investors will be encouraged to take profit and sell to the only buyer in the Street.

With covered bond primary issuance unlikely to grow next year and the ECB expected to prevaricate over the merits of full blown sovereign quantitative easing, covered bonds will be its main vehicle for expanding the balance sheet. This week the balance sheet shrank, so it had better step ...

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