Covered Bonds

The lack of covered bond issuance this year and further European Central Bank buying has depleted dealer trading inventories, causing a short squeeze in bonds eligible for its purchase programme (CBPP3). This has diverted real money interest to higher yielding bonds and those that are not eligible for the programme.

Caisse Française de Financement Local attracted strong demand for its 15 year covered bond on Monday, allowing the deal to be priced inside fair value. The strong outcome reflects the expected paucity of supply, giving issuers a compelling advantage, allowing them to “dictate deal terms”.

Yields in the covered bond market are at their highest level this year and some could soon offer a positive return. With banks now starting to emerge from blackout there are high hopes supply will improve next week, not least because recent issuance offers more precise market clearing levels and that should improve execution certainty.

The European Central Bank bought more than €5bn of covered bonds in January, even as net euro supply fell by €14bn. As a result, almost €20bn of private sector investments were forced to exit the market.

Aareal Bank issued the longest dollar Pfandbrief benchmark from a German issuer since 2016 flat to fair value and in good size on Wednesday. The transaction provided a statement of confidence in the credit, following its recent profit warning.

UK mortgage lender Perenna has completed its first round of private funding and plans to return for more within the next few months, before originating fixed for life mortgages in the second half of the year. That could lead to the first Danish style covered bond issuance in the UK.

After launching its first euro covered benchmark earlier this year, Aareal Bank returned on Tuesday to mandate leads for a dollar Pfandbrief.

Investors clamouring at a chance to diversify helped Argenta Spaarbank’s debut benchmark euro covered bond price close to where bonds from established Belgian issuers trade when it was issued on Tuesday.

UniCredit’s decision to align the definition of a defaulted receivable mortgage loan with the issuer's internal classification will have a negligible impact on the quality of the cover pool, said Moody’s.

Bankers said that they were hoping for an event to activate covered bond issuance, following January’s 66% year-to-date supply slump versus 2020. Banks' senior issuance was also surprisingly low, but has more chance of higher volumes in future.

Belfius Bank took advantage of a quiet market to issue a seven year senior preferred transaction on Monday which attracted exceptionally strong demand from bank treasuries buying for their liquidity portfolios, where demand competes with negative yielding covered bonds.

Amendments to the German covered bond law, which are expected to be signed off within the next few months, contain key details on how soft bullet extensions will be triggered, the interest rate that is applied in such an event and the size of the liquidity buffer required.