Covered Bonds

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.

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.