ECB to Buy

October 08 00:00 2011

New York, October 8 ( – The covered bond market in Europe will be bolstered with a €40bn purchase program by the European Central Bank. This move is aimed at boosting Europe’s economy and providing extra funding for banks. The decision taken by the central bank on Thursday comes 14 months after its last €60bn covered bond-buying purchase program.

Covered bonds have been very popular this year because mortgages and public sector loans have been the only funding tool available to the ailing banks of Europe. Investors see them as being safer than senior unsecured debt, which have normally been the source of bank funding, because these bonds have the backing of their own specific collateral.

Ted Lord, head of European covered bonds at Barclays Capital said that the ECB program “has a dual purpose. On the one hand, it helps the overall economy in the Eurozone. On the other, if banks can get additional liquidity from the ECB, it helps investors feel more comfortable. It turns a vicious cycle into a virtuous one.”

The last bond-buying program of the ECB was very successful and the central bank will now start buying covered bonds in primary and secondary markets from the start of next month. The ECB also announced a 12-month and 13-month refinancing operation to provide further liquidity for Europe’s financials.