Covered Bonds

Austrian lender Bawag has taken advantage of the sell-off in rates markets to mandate leads for a 15 year covered bond which, like de Volksbank’s recent deal, should also deliver a positive yield.

De Volksbank took advantage of a sell-off in the rates market to issue a 20 year covered bond on Wednesday and, thanks to the extra yield it offered enjoyed good demand, albeit quite sensitive.

The ease with which banks have been able to deploy retained covered bonds for repo funding with central banks has aggravated liquidity risks and undermined regulations that were designed to shore up liquidity management practices exposed as inadequate during the 2008 financial crisis.

De Volksbank mandated joint leads on Tuesday for a 20 year soft bullet covered bond, building on the earlier successes of two other issuers that recently responded to investor demand for yield with deals in this same maturity.

Apart from the UK, very few covered bond issuers have provided details on the proportion of loans in their cover pools that have been affected by payment holidays. Though covered bonds offer strong investor protection these safeguards risk being eroded.

The rise in yields following Monday’s rates sell-off has improved covered bond supply hopes. However, these have been tempered by the fact that most issuers have completed their 2020 funding and are waiting to see the outcome to European Central Bank’s monetary policy meeting in December.

Aegon Bank issued its first covered bond in three years on Monday, with the double digit spread drawing robust demand, enabling the conditional pass through bonds to be priced inside fair value, thereby catalysing a repricing of the Dutch CPT market. The deal follows a sub-benchmark 20 year soft bullet covered bond from NN Bank.

OP Mortgage Bank is set to become the first bank in Finland to issue a covered bond secured on energy efficient mortgages after announcing a green covered bond framework. The prospective deal follows a growing crowd and comes after a string of debut covered bonds with an environmental, social or governance theme issued this year.

Some market participants say the European Central Bank could open itself up to buying preferred senior bank debt if it expands its purchase programmes in December.

The Reserve Bank of Australia has announced plans to explore the potential uses and implications of a central bank digital currency using distributed ledger technology. The RBA follows the Banque de France, which last year worked with Société Générale to settle a crypto covered bond — a product that offers a number of ways to deploy blockchain technology.

Net covered bond supply is set to shrink further next year against what was an already dismal outlook for new deals. Expectations that the ECB will bring further monetary stimulus in December will only exacerbate the trend.

Although Danish covered bond issuance in euros is likely to prove limited, the domestic market continues to provide a rich seam of supply for foreign investors. Confidence is likely to have been bolstered by the limited impact of Covid lockdowns on the country's mortgage market, along with recent proposals to harmonise and update its legal framework.