September 2018

  • Redemption reinvestments will be a long-term feature that will remain with us well beyond the end of net additions to the APP at the end of this year. Our ECB strategists believe the Eurosystem will fully reinvest redemptions until at least the end of H121.
  • With not too much information out there on the modalities of CBPP 3 redemption reinvestments, we believe covered bond redemptions will be reinvested in covered bonds unless the Eurosystem sees a clear need to reallocate money to another APP programme. Hence, our base case is that in 2019 we will see around EUR23bn in CBPP 3 redemptions, a number that will jump to EUR30bn in 2020.
  • Across the regions, we believe redemption reinvestments will represent little more than half of the current volume in 2019, with this moving up to almost 70% in 2020. 2019 will thus be the low point for CBPP 3 flows.
  • Compared to current buying volumes, we believe the drop in CBPP 3 demand will be most pronounced in Italian covered bonds in 2019 and 2020, as there will be fewer redemptions in H119. On the other hand, for countries such as Portugal or Ireland, volumes could actually increase or at least remain stable despite net additions to the APP having come to an end at that point.

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