Covered Bonds

Traders this morning reported that the covered bond market couldn’t be further away investors’ focus as the financial markets were buffeted by fresh storms from the weekend, with eyes focused on government bonds and the equity markets. Despite this, they cautioned that some issuers were in for a reality check and had only been spared severe widening due to the gentleman’s agreement on market-making.

Comments from a Federal Deposit Insurance Corporation official that it would be acting fairly quickly to give regulatory clarity on the status of covered bonds in the US were welcomed by delegates at the Euromoney US Covered Bond Investor Forum in New York last week. However, there was disagreement as to whether attempts to introduce legislation would do harm or good.

ING Bank flew in the face of prevailing wisdom yesterday (Thursday), paying 30bp over mid-swaps to sell a Eu1bn five year structured covered bond – its first, at that – which showed that rumours of the primary market’s death had been greatly exaggerated.

US Treasury secretary Hank Paulson came out as the latest convert to covered bonds yesterday (Thursday), saying that they could help address some of the problems in the US mortgage finance industry that have come to light in the subprime crisis.

Representatives of BlackRock, the Tennessee Consolidated Retirements System, and TIAA-CREF delivered their verdicts on covered bonds at the Euromoney US Covered Bond Investor Forum yesterday (Wednesday), and, with apologies to Mr Clinton in this election year, their views could be summed up by the slogan: it’s the liquidity, stupid.

Covered bond market participants were suffering from shock today (Thursday) after ING Bank opened books for its debut issue late this morning. But by early afternoon they were celebrating the reopening of a primary market that had been expected to remain moribund until perhaps after Easter at the earliest, albeit with a five year deal at 30bp over mid-swaps.