Covered Bonds

Swedish bankers have argued that proposed amendments to the country's covered bond law, which bring it into line with the EU's Covered Bond Directive (CBD), must demand that liquidity buffers in soft bullet bonds cover interest payments during any 12 month extension period, as opposed to covering interest and principal for 180 days — a standard more commonly seen in hard bullet maturities.

Covered bond spreads are so tight that asset managers with strict mandates to invest only in this asset class, such as Union Investment in Germany, have limited room to extract relative value and post a better performance than the main indices. And unlike last year, when falling interest rates boosted absolute returns, the rates outlook is less certain.

UK covered bonds are trading close to where they would be expected, given their new regulatory treatment outside the European Union. And while euro supply prospects this year could improve on last year’s paltry sum, the vast swathe of bonds redeeming in the same period translates to a technical imbalance which will support spreads.

Argenta Spaarbank has mandated leads to issue its debut covered bond deal. The mandate follows the National Bank of Belgium's decision to grant it a covered bond licence, taking the number of issuers in the country to five, boosting the prospects for supply this year.

An undercapitalised bank in the crosshairs of a market rout can expect counterparties to demand higher margin calls, particularly when a lot of its assets are already encumbered, as is the case at many European banks. This is a problem of the European Central Bank’s making and one that only it can fix. Making covered bond repo haircuts more severe would be a good place to start.

The covered bond market bounced back from last week’s temporary supply indigestion on Monday, following strong deal outcomes for DZ Hyp and Société Générale, which issued the tightest French transaction of the year.

DZ Hyp is preparing to print its first covered bond of the year. The deal could be launched as soon as Monday, which would allow the German lender to get its business done ahead of an expected EU deal for the Support to Mitigate Unemployment Risks in an Emergency (SURE) programme.

Caffil plans to issue privately placed covered bonds from its social framework, which secures financing for French hospitals. The longer maturities on offer will diversify from those targeted in its benchmark deals and more closely match its loan liabilities, as well as fulfilling investor needs.

Swiss franc bond investors are pursuing high quality issues, with Münchener Hypothekenbank harnessing this demand to price a tap of its green preferred senior bond 12bp through fair value this week.

The covered bond market is set to experience one of the steepest declines in issuance on record this January. Yet, despite a poor start, bankers still expect a resurgence in the primary market, although extended lockdown restrictions are creating uncertainty.

A double-digit spread over mid-swaps is still possible in covered bonds from Poland, Slovakia and Dutch conditional pass-though deals, suggesting scope for performance is strongest in these markets, said bankers on Wednesday.

Sparebanken Sør Boligkreditt’s covered bond drew more demand than competing deals issued by Berlin Hyp and Royal Bank of Canada on Tuesday, thanks to its more generous spread, shorter duration and favourable liquidity treatment.