Covered Bonds

A draft amendment to the Hungarian covered bond regime, that brings it into line with the European Union's Covered Bond Directive, is likely to be a positive for the product's credit and should improve prospects for issuance in euros.

Inflation fears are biting European markets just as investors seem to be losing confidence in the ECB's support of the market. The first bow waves of a European taper tantrum rocked rates this week as primary markets did their best to plough on. The European Union braved the volatility to land a colossal deal, while two covered bond issuers fared worse. Lewis McLellan and Bill Thornhill report.

Covered bonds issued this week by United Overseas Bank and Raiffeisen-Landesbank Steiermark showed that, for the first time this year, sentiment has turned bearish and suggested that more careful consideration of pricing, timing and maturity is now required.

Oversea-Chinese Banking Corporation is seeking investors' consent on Thursday to convert a sterling covered bond from referencing Libor to Sonia amid what Fitch described as an improved outlook for Asian covered bond issuance. Covered bond bankers agreed with the sentiment but noted issuers were hesitant and clearing levels have shifted wider after this week’s supply.

Spreads in the European sovereign, supranational, agency sector moved wider on Wednesday in the wake of the European Union’s deal with the Street accounting for most of the flows.But with Bund yields expected to stabilise soon spreads should consolidate, believed several traders.

Tuesday’s deals from UOB and Raiffeisen-Landesbank Steiermark provided a wake-up call to the covered bond market that showed, no matter how strong the technical factors keeping pricing tight, it is not insulated from the rates market. A readjustment at the ultra-long end of the curve was overdue, said bankers, and they expect issuers to print shorter deals from now on.

Volatility, partly induced by inflation fears, has been upsetting rates and equities markets, but data recorded by GlobalCapital suggests that the primary market has remained resilient, despite sharp moves government bond markets.

United Overseas Bank managed to extend its curve with €750m of eight year funding in the covered bond market on Tuesday at levels were well inside its previous blowout deal issued in November. However, bankers off the mandate gave the deal mixed reviews.

Austria's Raiffeisen-Landesbank Steiermark’s issued a €500m 20 year mortgage covered bond on Tuesday that was barely subscribed and, for the first time in the covered market since September 2019, leads were unable to tighten pricing from the initial level.

Secondary bond traders in the SSA and covered bond markets are focussed on Tuesday’s European Union new issue amid hopes that it will help draw a line as far as secondary market weakness is concerned. But with one eye on the European Central Bank’s June meeting, there is still some trepidation about prospective cuts in central bank asset purchasing.

United Overseas Bank and Raiffeisen-Landesbank Steiermark (RFLBST) have mandated leads for covered bond deals amid a weakening spread environment.

Two recent studies have added to the growing body of research that points to a surge in green covered bond issuance following the implementation of the EU's Taxonomy of Sustainable Activities.