Covered Bonds

Swedish Covered Bond Corporation’s (SCBC) benchmark eight year deal, syndicated on Monday, was slow to build and, even though the final spread looked fine, the process clearly showed that investors are reticent to buy deals at prevailing levels.

Eika Boligkreditt has mandated joint leads for a 10 year and its first green covered bond under its newly established green framework. At the same time, Bank of New Zealand plans a seven year benchmark and Finland's Oma Savings Bank intends to tap its outstanding six year deal.

Banks are asking whether funding conditions have reached a peak, as investors find more reason to balk at tight bond valuations. Deal arrangers argue markets will hold together, but the future could still hold higher new issue premiums and a more careful approach when it comes to trade selection.

The sovereign, supra and agency sector has seen better buying interest over the past week, but the long end continues to look more vulnerable ahead of the European Central Bank meeting and expected supply.

Aegon’s head of capital market solutions, Lein Pieter Cevaal, speaks to GlobalCapital about the bank’s recent experience with its debut 15 year soft bullet covered bond, a maturity that worked well for the borrower despite awkward market conditions.

The primary market for covered bond issuance is expected to improve in the five to 10 year part of the curve in the run up to next week’s European Central Bank meeting. Although Aegon Bank showed that the ultra-long long end is open, a more guarded approach is warranted, said bankers on Thursday.

Aegon Bank paid special attention to timing when pricing its first soft bullet covered bond, reflecting challenging market conditions, according to the bank's head of capital market solutions, Lein Pieter Cevaal.

The skittish state of investor demand that was recently on display in covered bonds may herald a reassessment of credit, particularly as spreads are back to pre-pandemic levels and seemingly have limited potential for further performance.

As inflation fears spread through the bond market, demand has fallen, particularly at the long end of the curve. However, the SSA market defied this trend last week with borrowers seeking duration, with the average maturity of a deal around 13 years. Similarly, the corporate market stretched its averaged maturity to 12 years, from just 7.4 years the week before.

Bank of Montreal attracted good demand for a €1.25bn eight year covered bond on Tuesday and paid a modest new issue concession. The outcome was deemed a fine result given that market conditions are not at their best.

Aegon Bank has mandated leads for its first soft bullet covered bond with a deal in the ultra-long end, where demand has proved tricky more lately. Unlike Aegon’s previous conditional pass through (CPT) issuance, this transaction is eligible for the ECB's Covered Bond Purchase Programme.

Rates traders were sanguine about the market outlook over the next month in the belief that low supply and high redemptions will support spreads. But long term questions about the extent of central bank asset purchases, both in the US and Europe, are expected to come back to haunt them.