Covered Bonds

The technical outlook for covered bonds had always been supportive, but after it emerged that newly mandated EU bonds were trading sharply higher in the grey market on Monday, traders were even more confident, especially for deals in the ultra-long end of the curve, such as CFF’s transaction issued on Monday.

Compagnie de Financement Foncier (CFF) was able to raise €500m of 15 year funding flat to its curve on Monday. But, in anticipation of the EU's 10 and 20 year dual tranche mandate, announced the same morning, investors of the first negative yielding 15 year covered bond showed a degree of price sensitivity.

Despite the Eurozone covered bond market’s huge size, its inherent liquidity is dwarfed by much smaller sectors outside the trading block — effectively meaning ‘the market’ is slowly but surely becoming impotent.

FIG borrowers may be well funded, but rates are low and market conditions are good enough to support opportunistic issuance — as was shown this week by a slate of deals across the capital structure. Given a volatile end to 2020 is likely, issuers will need to stay alert and take advantage of funding windows as they arise, write Frank Jackman and Bill Thornhill.

The European Commission has unveiled bold plans to promote the renovation of existing housing stock in a bid to improve energy efficiency and so cut EU’s carbon footprint and provide a much-needed stimulus to the economy. At the same time, the European Covered Bond Council is implementing its energy efficient mortgage plan that aims to improve the supply of collateral securing green covered bond issuance.

After an extensive marketing period, done with the intention of issuing a benchmark sized deal, Bausparkasse Schwäbisch Hall’s first Pfandbrief, issued on Thursday, attracted more demand, at a tighter spread and a longer duration than a Pfandbrief its compatriot building society, Wüstenrot Bausparkasse, issued this week.

Bausparkasse Schwäbisch Hall (BSH) mandated leads for its debut covered bond on Wednesday. The benchmark sized deal will take advantage of the strong demand seen for Tuesday’s Pfandbrief from German building society peer, Wüstenrot Bausparkasse.

The Baltic covered bond market is expected to take another stride forward with the advent of Latvia’s draft law, which currently is being debated in parliament. At the same time, the European Bank for Reconstruction and Development (EBRD) has been working closely with the Bulgarian, Croatian and Ukrainian authorities to help develop the basis for their own covered bond laws.

Wüstenrot Bausparkasse attracted exceptionally strong demand for its seven year Pfandbrief launched on Tuesday, causing the issuer to increase the deal’s size from an originally planned sub-benchmark size to benchmark. In so doing it further improved the scale and quality of the order book reflecting improved regulatory treatment and index inclusion for the deal.

Secondary covered bond market turnover has fallen since the European Central Bank's Covered Bond Purchase Programme (CBPP3) began, with the ECB accounting for an unprecedented proportion of overall turnover, according to a report published in the European Covered Bond Council’s fact book, published last Friday.

The European Central Bank's Isabel Vansteenkiste welcomed a proposal for green Targeted Longer-Term Refinancing Operations (TLTROs) on Monday, but talked through what she saw as some concerns with the idea.

Caffil attracted robust demand for its fifth covered bond this year on Monday, thanks to the positive yield on offer at the unusual 15 year maturity. But with a wave of cheap European Union 15 year supply expected to surface before long, other issuers may try to follow Caffil's lead and jump in ahead.