Banks Seen Selling ABS Stockpiles as ECB Purchases Underwhelm

Banks that loaded up on asset-backed securities to sell to the European Central Bank have been left exposed by the pace and timing of its 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 officer, wrote in a note today. 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 Nov. 21, more than six months after first suggesting it would. Since starting its asset-purchase program in October, the Frankfurt-based central bank bought about 600 million euros ($742 million) of ABS and 21 billion euros of covered bonds.

“So far the program 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 ABS they have been thwarted by timing. Banks have had to let their inventory go back into the market.”

The ECB signaled it will be cautious as it buys ABS, the second phase of its asset-buying program, which started with covered bonds and could include government debt.

By selling ABS, banks have driven up the average extra yield investors demand to hold the securities compared with benchmark rates, according to Holman. The yield premium rose five basis points to 75 basis points since hitting a seven-year low in October, according to data compiled by Barclays Plc.

TwentyFour manages 3.6 billion pounds ($5.6 billion) and runs a closed-end fund that invests in ABS, according to its website.

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