Covered Bonds

Senior bank finance and capital markets figures speculated this week about where the ECB would be most likely to throw its weight in its effort to boost the sustainability of its balance sheet. With a senior eurozone central banker having recently urged it to decarbonise its assets, banks are on high alert as they anticipate sweeping changes to asset purchase and repo terms, writes Bill Thornhill.

The transposition of the EU's Covered Bond Directive (CBD) into Spanish law is likely to be credit positive, according to a poll of delegates who attended the Association of Financial Markets in Europe’s 12th annual Spanish Capital Markets Virtual Conference on Thursday.

Raiffeisenlandesbank Vorarlberg launched a 15 year covered bond on Wednesday that was three times subscribed and priced flat to fair value. It suggested that investors were eager to catch higher yields before they disappear.

The outlook for covered bond spreads has improved following this year’s rise in yields, although there is contention over whether the short or long end of the curve is the best place invest.

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.