Covered Bonds

Levels of asset encumbrance increased sharply in the first half of 2020, the European Banking Authority said in a report this week. It warned that roughly half of the assets eligible as collateral for central bank funding schemes are now encumbered.

Royal Bank of Canada issued a tightly priced €1.25bn 10 year covered bond on Tuesday. While it only attracted just enough demand for it, the long tenor, investor diversification, cost of funding and deal size were positives for the borrower.

Korea’s KEB Hana Bank attracted a €2bn order book for its €500m debut covered bond on Tuesday, boosting hopes for an improvement in the secondary market performance of similar deals from South Korea that offer outsized spread pickups.

Even though technical factors are highly supportive for covered bonds, traders say they are unwilling to lift offers, reflecting increased anxiety about limited performance potential and an underlying concern that credit market sentiment is less sure-footed that at the start of this year.

Credit Suisse issued a two-part covered bond in Swiss francs on Monday, choosing to limit the deal sizes in order to ensure a tight spread and low yield.

BPCE found good demand for a two-part covered bond on Monday with the bonds pricing almost flat to its curve. Even so, the near term outlook has become less certain as German lockdowns are expected to be tightened amid renewed concern over the impact on commercial mortgages secured in some Pfandbrief.

Muenchener Hypothekenbank (MuHyp) sold the longest covered bond of the year so far this week, and bankers expect more long end deals to follow.

This week’s burst of covered bonds was exceptionally well received and boosted supply hopes. But even though the funding was cheap and deal execution certain, the supply outlook remains grim.

Tight valuations in euros are making it difficult for banks to impress investors with new senior trades. Issuers may have to pay up or switch focus to other asset classes to make the most of the January market.

After a near two year absence, Deutsche Bahn pulled into the Swiss franc market to issue 15 year debt with no new issue premium this week, landing inside its own euro curve.

Muenchener Hypothekenbank (MuHyp) has mandated joint leads for a 20 year Pfandbrief, the longest covered bond so far this year.

DNB Boligkreditt issued a covered bond on Thursday that became its most oversubscribed covered bond ever, equalling the bank’s biggest ever order book. The deal, secured on green mortgages, was priced through its vanilla curve, clearly demonstrating the demand for covered bonds.