Covered Bonds

Spanish pharmaceutical bank specialist, Bancofar and its parent, Banco Caminos, which provides finance to civil engineers, have set up small covered bond programmes that have been assigned an Aa1 rating by Moody’s.

Covered bond traders are paring back inventory as they approach the end of the year, though there are a few sectors of the market where they intend to hold positions. High redemptions in the first half of the year will support spreads but January’s issuance glut may not see a rise in new issue premiums.

The outlook for Asian covered bond supply will have improved slightly in the wake of Tuesday’s deal from United Overseas Bank, particularly among Singaporean lenders. But issuance from Australia and New Zealand is expected to be more limited, reflecting their banks' priority to get ahead with regulatory funding.

After a decade of slumber, the market for euro-denominated Hungarian covered bonds could be poised to reopen. Hungary covered bonds may have a low country ceiling credit rating but the market is well protected and could offer positive yields.

United Overseas Bank revitalised the moribund Singaporean covered bond market on Tuesday with the first euro deal in two years and the largest from a Singaporean issuer. The bonds attracted record demand and were priced inside UOB’s curve, showing the extraordinarily receptive state of the market.

As the UK approaches the end of its Brexit transition period there are growing expectations that a trade deal will be struck with the EU. It is hoped that that will contribute to the factors driving spreads tighter on UK covered bonds.

United Overseas Bank has mandated leads for the first euro covered bond benchmark from a Singapore lender since September 2018. The deal takes advantage of the Monetary Authority of Singapore’s (MAS) recent decision to increase covered bond issuance capacity.

Dutch issuers are warming towards soft bullet covered bonds, with several having already launched deals with the structure this year, as part of a move away from conditional pass through (CPT) issuance.

Rabobank sold the largest 20 year covered bond of the year at the tightest spread it has ever achieved in that tenor on Thursday, illustrating superb market conditions.

Limited supply prospects next year suggest that relentless purchases under the European Central Bank’s Covered Bond Purchase Programme (CBPP3) will continue to exert a strong influence on yields, squeezing more real money investors out of the market, even though its gross purchases may decline.

Oma Savings Bank attracted exceptionally strong demand for its sub-benchmark covered bond on Wednesday, thanks to the double digit spread pickup it paid compared to deals from compatriot Finnish national champions. Caffil, meanwhile, recently issued an ultra-long private placement and said it plans to print further out the curve.

Covered bonds are expected to remain a core funding tool next year and the outlook for supply is likely to improve. However, net of redemptions and central bank purchases, the market will remain highly squeezed.