ECB Said to Start Purchase Program With French, Spanish Debt.

http://www.bloomberg.com/news/2014-10-20/ecb-said-to-start-asset-purchase-plan-buying-french-covered-debt.html

The European Central Bank bought covered bonds for the first time since President Mario Draghi unveiled an asset purchase program last month.

The ECB acquired short-dated French notes from Societe Generale SA (GLE) and BNP Paribas SA as well as Spanish securities from other lenders, according to two people familiar with the matter who asked not to be identified because the information is private. Draghi said he intends to expand the bank’s balance sheet by as much as 1 trillion euros ($1.3 trillion) to stave off deflation in the euro area.

Policy makers are under pressure to take action as euro-area inflation slowed to 0.3 percent in September and the International Monetary Fund said the region has as much as a 40 percent chance of entering its third recession since 2008. Growth will reach 1.3 percent next year, slower than he 1.5 percent pace predicted in July, after a 0.8 percent gain this year, the IMF said Oct. 7.

“From today we will begin to know how aggressive the ECB will be in bidding for bonds,” said Agustin Martin, head of European credit research at Banco Bilbao Vizcaya Argentaria SA in London.

European Mortgages

An ECB spokesman confirmed that purchases under the bank’s third covered-bond program started today. Officials at SocGen and BNP weren’t immediately available to comment on the transactions.

The 250-year-old covered bond market helps fund Europe’s mortgage industry and the notes have historically been attractive to investors because they’re guaranteed by the issuer and backed by a pool of assets. Europe’s market for covered bonds shrank for the first time in at least a decade last year and will decline further in 2014 and 2015, according to the European Covered Bond Council.

Covered-bond purchases are the latest addition to the ECB’s medley of unconventional tools that also includes targeted long-term loans to banks and a negative deposit rate. The central bank will also start buying asset-backed securities before the end of the year.

This will be the third time the ECB has created a program to buy covered bonds, with previous purchases starting in July 2009 and November 2011. The bank’s first foray into the market was designed to improve financing after the collapse of Lehman Brothers Holdings Inc. and the second was to support lenders during Europe’s sovereign debt crisis.