However, we believe this could be an underreaction, as we expect this will further strengthen technicals, Because of the increase in APP, CSPP will see higher than expected purchases, as CSPP already runs at 27.5% of APP.
There is market talk about the ECB changing their strategy for primary and lowering the amount they add to books, down from the normal 40% for all eligible new issues.
To transition the end of PEPP in March, APP will increase by up to €40bn per month in 2Q22, then drop slightly to €30bn per month in 3Q22, to eventually come back down to the normal €20bn per month as per October.
In any case, this will be very supportive for spreads, particularly as we expect to see a substantial drop in eligible supply.
With already lower net supply, the increase in CSPP purchases will push net supply after demand to below zero.
In conclusion, this will be supportive for credit and we expect this strong technical picture will keep any spread widening subdued, and likely keep spreads relatively tight.
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