Covered Bonds

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.

A proposed French law may incentivise owners to take out loans that improve the energy efficiency of their homes, which could boost green mortgage production and green covered bond issuance.

Aija Zitcere, director in the financial markets policy department of the Latvian Finance Ministry and her colleague, Imants Tiesnieks, a senior expert in the same department, discuss the main features of Latvia’s covered bond law, which was approved by its Parliament on Wednesday.

Westpac New Zealand attracted a high quality order book for a covered bond issue on Wednesday but it was slow to build and thinly subscribed, leading some to conclude that the market lacked confidence.

Hedge funds have taken a lot of heat for their role in inflating order books and flexing spreads, only to flip out and take profits at the first opportunity. But despite the awkward and at times antagonistic presence of such funds, issuers are coming to learn that they are probably better off having them in the order book than not.

Investors in Europe's high grade corporate bond market became increasingly selective last week. Average new issue premium shot up to almost 11bp from minus 2bp the week before. The move gave some insight as to which sectors of the economy investors see the pandemic recovery taking place in.

BPCE re-established confidence in the primary covered bond market with a successful €1.5bn nine year green transaction on Tuesday, opening the way for other issuers planning deals.

There was strong buying interest in recent long dated bonds from the EU on Monday, said traders, as well as those of semi-core European sovereigns. That is expected to continue this week as hedge funds circle the EU's most recent bond.