ECB buys covered bonds for first time

The European Central Bank has bought covered bonds for the first time since president Mario Draghi unveiled an asset purchase programme last month.

The ECB acquired short-dated French notes from Société Générale and BNP Paribas, as well as Spanish securities from other lenders, said two sources. Draghi said he intends to expand the bank’s balance sheet by as much as €1tn to stave off deflation in the eurozone.

Policymakers are under pressure to take action as eurozone inflation slowed to 0.3% in September and the IMF said the region has as much as a 40% chance of entering its third recession since 2008. Growth will reach 1.3% next year, slower than the 1.5% pace predicted in July, after a 0.8% gain this year, the IMF said earlier this month.

“From today we will begin to know how aggressive the ECB will be in bidding for bonds,” said Agustin Martin, head of European credit research at Banco Bilbao Vizcaya Argentaria SA in London.

An ECB spokesman confirmed that purchases under the bank’s third covered-bond programme started yesterday. Officials at SocGen and BNP were not immediately available to comment on the transactions.

The 250-year-old covered bond market helps fund Europe’s mortgage industry and the notes have historically been attractive to investors because they are guaranteed by the issuer and backed by a pool of assets.

Europe’s market for covered bonds shrank for the first time in at least a decade last year and will decline further in 2014 and 2015, according to the European Covered Bond Council.

Covered-bond purchases are the latest addition to the ECB’s medley of unconventional tools that also includes targeted long-term loans to banks and a negative deposit rate. The ECB will also start buying asset-backed securities before the end of the year.

The ECB is probably making its first purchases from the existing stock of covered securities because there are no new issues currently being marketed that meet its criteria, said Michael Spies, a covered bond strategist at Citigroup in Frankfurt, who spoke before the purchases took place yesterday.

“The pipeline for primary market deals is not really full and those issuers which plan to tap the market in the nearer term are non-euro area banks,” said Mr Spies.

This will be the third time the ECB has created a programme to buy covered bonds, with previous purchases starting in July 2009 and November 2011.

The bank’s first foray into the market was designed to improve financing after the collapse of Lehman Brothers and the second was to support lenders during Europe’s sovereign debt crisis.