Covered Bonds

Covered bonds spreads make "no sense" against other asset classes, according to market participants, but issuers can still expect to price bonds inside fair value and be confident their deals will perform thanks to the impact of European Central Bank purchases and negative net supply.

The Austrian covered bond issuer Bawag has bought Depfa Bank from the German wind-down agency, FMS Wertmanagement.

Feeble bank lending figures suggest that some European banks will not be able to tap the ECB's Targeted Longer-Term Refinancing Operations (TLTRO) at the cheapest rate on offer. For those institutions, covered bond funding will become a compelling alternative.

The covered bond market is historically cheap relative to senior unsecured paper, but real money buyers have been unimpressed as other valuation comparisons have proved more important.

Canada’s Equitable Bank has registered its covered bond programme this week. It expects to issue its first transaction in euros at the short end of the curve in the second quarter.

Achmea has become the latest Dutch bank to transition to a soft bullet maturity. This will have a material impact on central bank treatment and funding, but opportunities to extract value in the secondary market will be a challenge.

The European Covered Bond Council is to launch its energy-efficient mortgage label on Friday with a virtual event. The label will act as a “lighthouse” for all stakeholders, marking a clear way towards a green housing renovation revolution, the ECBC’s Luca Bertalot told GlobalCapital on Tuesday.

The lack of covered bond issuance this year and further European Central Bank buying has depleted dealer trading inventories, causing a short squeeze in bonds eligible for its purchase programme (CBPP3). This has diverted real money interest to higher yielding bonds and those that are not eligible for the programme.

Caisse Française de Financement Local attracted strong demand for its 15 year covered bond on Monday, allowing the deal to be priced inside fair value. The strong outcome reflects the expected paucity of supply, giving issuers a compelling advantage, allowing them to “dictate deal terms”.

Yields in the covered bond market are at their highest level this year and some could soon offer a positive return. With banks now starting to emerge from blackout there are high hopes supply will improve next week, not least because recent issuance offers more precise market clearing levels and that should improve execution certainty.

The European Central Bank bought more than €5bn of covered bonds in January, even as net euro supply fell by €14bn. As a result, almost €20bn of private sector investments were forced to exit the market.

Aareal Bank issued the longest dollar Pfandbrief benchmark from a German issuer since 2016 flat to fair value and in good size on Wednesday. The transaction provided a statement of confidence in the credit, following its recent profit warning.