Covered Bonds

Confidence in the rates and covered bond secondary markets improved on Tuesday in the wake of a strong performance in the EU’s debut Next Gen deal, despite an initial wobble when the deal weighed in at €20bn, which was larger than expected.

TSB Bank attracted good demand for its Sonia-linked covered bond on Tuesday, pushing out along the curve with a rare seven year that sufficiently differentiates from central bank liquidity. The extraordinarily strong sterling market conditions encouraged Canadian Imperial Bank of Commerce to follow Bank of Nova Scotia and mandate leads for another five year Sonia offering.

Bank of Nova Scotia (BNS) priced its first Sonia-linked Canadian covered bond, the largest ever issued against Sonia and the first from a Canadian bank in well over a year on Monday. A t the same time TSB mandated leads for another Sonia linked covered bond.

An ECB meeting on Thursday that delivered what traders had predicted meant there was little volatility in the rates market that afternoon. With a glut of supply about to come from the EU, one trader predicted spread tightening may follow the bellwether trade.

The UK has begun the process of creating its own versions of the European Union’s sustainable finance regulations, by picking a Green Technical Advisory Group to help it draft a green taxonomy. It will face two conflicting priorities: to maximise harmonisation by staying close to EU rules; and to depart from them, for a variety of reasons including the possibility of improving on the EU’s approach.

Covered bonds issued this week by SCBC and Bank of New Zealand were thinly oversubscribed and illustrated that investors are still sensitive to price, albeit that demand was good for a small green debut from Eika Boligkreditt and a tap from Oma Savings Bank.

Moody’s has published a request for comment regarding a proposed change in its rating methodology that could improve the rating stability of Swiss structured covered bonds. This could in turn give regulators another reason to consider updating the country’s legal framework.

Banks have already printed more green bonds this year than they sold in the whole of 2020 and the momentum in issuance is showing no sign of slowing. Borrowers are increasingly interested in labelling subordinated debt, amid growing evidence that such products can offer even more pricing power.

The European Central Bank bought fewer covered bonds in May than it did in any month this year so far but its portfolio still grow and may do so by even more in June. With supply still likely to be limited, this should keep prospective spread widening contained ahead of a supply glut in the sovereign, supranational and agency sector.

Bank of Montreal is seeking investor consent to switch from referencing Libor to Sonia on its sterling covered bond, following similar moves from other borrowers. Different calculation methods are emerging for the transition.

Issuance seized up across most markets last week with lower rated FIG and corporate deals staying clear of the primary market as many participants struggled with a combination of low subscriptions and tight spreads. Subscriptions remain deflated but concessions fell across the board as increased selectivity led to more focus on green/sustainable labels.

Bank of New Zealand (BNZ) priced an €850m seven year covered bond on Tuesday in line with the bid side of Westpac New Zealand’s deal in the same size and tenor issued last week. Although the order book was thinly subscribed, lead managers deemed the quality of orders high.