Covered Bonds

NN Bank took advantage of rising yields to issue a 20 year covered bond on Tuesday which was priced inside fair value.

NN Bank has mandated leads for a 20 year covered bond amid improved hopes of an increase in supply, as banks emerge from blackout to take advantage of the recent rise in yields.

This week’s ground-breaking 10 year Sonia index-linked covered bond transaction from Nationwide is most likely to appeal to other UK Building Societies, as opposed to the large UK commercial banks who have a larger proportion of suitable assets to access central bank funding.

The depth of demand for financial institutional funding in the domestic Scandinavian currency markets was illustrated this week with a series of covered bonds and subordinated new issues.

Nykredit Realkredit is expected to open order books for two Swedish krona covered bonds on Thursday with a combined value of about €2bn, including one secured on green mortgages.

The Association of German Pfandbrief Banks has developed a contract to ensure Pfandbrief investors’ priority claims on UK-based cover pool assets after Brexit.

The size of a covered bond liquidity buffer that protects investors against the risk of payment disruption should be an important risk consideration, but there is no incentive to play safe as regulatory and central bank treatment of the asset class play more pivotal roles in valuations.

Nationwide Building Society has become the first borrower to issue a 10 year deal linked to the Bank of England’s Sonia index. The covered bond, which was issued on Tuesday with a highly oversubscribed order book, provided Nationwide with its cheapest ever funding and will be closely watched by other issuers looking to make similar deals.

Covered bonds spreads make "no sense" against other asset classes, according to market participants, but issuers can still expect to price bonds inside fair value and be confident their deals will perform thanks to the impact of European Central Bank purchases and negative net supply.

The Austrian covered bond issuer Bawag has bought Depfa Bank from the German wind-down agency, FMS Wertmanagement.

Feeble bank lending figures suggest that some European banks will not be able to tap the ECB's Targeted Longer-Term Refinancing Operations (TLTRO) at the cheapest rate on offer. For those institutions, covered bond funding will become a compelling alternative.

The covered bond market is historically cheap relative to senior unsecured paper, but real money buyers have been unimpressed as other valuation comparisons have proved more important.