ECB disappoints on asset-backed securities

Banks that loaded up on asset-backed securities to sell to the ECB have been left exposed by the pace and timing of the purchases, according to TwentyFour Asset Management.

Lenders are selling the debt back to the market because the ECB bought fewer bonds than anticipated and started measures to flood the euro area with liquidity at the end of the year, Mark Holman, the investment firm’s London-based chief executive, wrote in a note.

Banks bought the bonds expecting ECB purchases to spur a rally that would allow them to sell their holdings at higher prices, he wrote.

The ECB bought asset-backed bonds for the first time on November 21, more than six months after first suggesting it would. Since starting its asset-purchase programme in October, the Frankfurt-based central bank bought about €600m of asset-backed securtities and €21bn of covered bonds.

“So far the programme has underwhelmed,” Holman wrote.

“The trade has worked for them in covered bonds perfectly as the ECB has cleared out all the inventory, but in asset-backed securities they have been thwarted by timing. Banks have had to let their inventory go back into the market.”

The ECB signalled it will be cautious as it buys asset-backed securities, the second phase of its asset-buying programme.

By selling asset-backed securities, banks have driven up the average extra yield that investors demand to hold the securities compared with benchmark rates, said Holman.

The yield premium rose five basis points to 75 basis points since hitting a seven-year low in October, according to Barclays data.