May 13 (Bloomberg) -- The European Central Bank’s plans to buy 60 billion euros ($80 billion) of covered bonds has failed to revitalize the market due to uncertainty over what securities policy makers will buy.

The difference between the price at which banks buy and sell the debt has increased since the ECB’s announcement last week, said Fritz Engelhard, an analyst at Barclays Capital in Frankfurt. The bid/offer spread, a measure of the cost of trading, for some five-year French covered bonds has widened to 30 basis points from 20, he said.

The $2.8 trillion market for the notes backed by mortgages and public-sector loans has been roiled by the credit crisis, with just 50 billion euros of the debt issued this year, down from 102 billion in 2008, according to data compiled by Bloomberg. The market is now in limbo until June 4 when the ECB said it will identify which securities it will buy.

“Secondary market liquidity in the covered bond market has become more challenging since the ECB’s announcement,” said Engelhard. “The levels at which market makers will bid for most covered bonds have improved somewhat, but the offer spreads have fallen more dramatically because market makers don’t want to be caught on the wrong foot.”

ECB council member Marko Kranjec said today the bank is likely to increase its asset-purchase program from an initial 60 billion euros and may also broaden its scope from covered bonds.

Fellow member Axel Weber said yesterday he sees “no need” for the ECB to buy further private assets to support lending. “I currently don’t see the need for outright purchases of further private debt obligations,” Weber said in a speech in Munich.

Banco Santander

Banco Santander SA issued 1.5 billion euros of covered bonds on May 11 in the first sale of the debt by a Spanish bank in almost a year. The bid/offer spread on so-called cedulas issued by groups of banks has increased to 50 basis points from 30 basis points before the central bank’s announcement, according to Engelhard. A basis point is 0.01 percentage point.

“The market is likely to see limited turnover and face wide bid/offer spreads until further details are published,” Deutsche Bank AG analysts led by Bernd Volk in Frankfurt wrote in a note to investors.

Covered bonds, issued to supply most of Europe’s mortgage funds, differ from debt backed by home loans in that the notes are supported by a borrower’s pledge to pay.

The ECB’s plan has narrowed the yield spread over benchmark rates that investors demand to buy French covered bonds, known as obligations foncieres, by about 20 basis points to 120 basis points more than the benchmark mid-swap rate, according to Barclays data.

“It’s clearly a very strong positive for the market; the problem is we don’t know how positive,” said Richard Kemmish, the London-based head of covered bond origination at Credit Suisse Group AG.

To contact the reporters for this story: Neil Unmack in London nunmack@bloomberg.netEsteban Duarte in Madrid at eduarterubia@bloomberg.net;

Last Updated: May 13, 2009 08:30 EDT