Unicredit: End Of ECB APP Reinvestments To Have A Limited Impact On Spreads

Unicredit note that “the end of APP reinvestments from July requires private investors to step up their purchases of fixed income assets by around EUR50bn this year compared to our previous expectation that the ECB would increase the monthly runoff to EUR20bn from July. Once split across the various asset classes, it is a relatively small increase and should result in only moderate pressure on credit spreads. If anything, we see covered bonds and supranationals as potentially more affected.”

• “The portfolio runoff may be larger in 2024 as APP redemptions could be as high as EUR 350bn. However, if inflation slows and the ECB starts dialing back some of its recent tightening, the runoff of the APP portfolio may be reduced or even stopped.”
• “PEPP reinvestments, which are set to continue at least until the end of 2024, will almost exclusively benefit public-sector bonds as this asset class represents 96% of the PEPP portfolio. Redemptions of corporate bonds in the PEPP portfolio could be used to support the green tilt, although they are likely to be much smaller than redemptions under the APP.”