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.

The ECB is probably making its first purchases from the existing stock of covered securities because there are no new issues currently being marketed that meet its criteria, said Michael Spies, a covered bond strategist at Citigroup Inc. in Frankfurt, who spoke before the purchases took place today.

?“The pipeline for primary market deals is not really full and those issuers which plan to tap the market in the nearer term are non-euro area banks,” said Spies.

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.

Eoin Treacy's view

The ECB’s purchases of asset backed/covered bonds represent an additional foray into quantitative easing. This should help counteract the deflationary impact of its shrinking balance sheet over the last two years provided the policy is sustained. Since the market is illiquid, it is only a matter of time before enterprising origination desks within the Eurozone’s financial sector securitise additional loans so they can be sold to the ECB. This should also help to encourage lending to SMEs since the ECB will provide a ready market for the sale of loans.  Easing of monetary policy by the ECB should act as a medium-term tailwind for asset prices.

The Euro Stoxx 50 Index rallied well on Friday and held the majority of the advance today. Some additional ranging is a possibility as the deep short-term oversold condition is unwound. The Thursday low near 2800 will need to hold if potential for higher to lateral ranging is to remain credible.