Covered Bonds

The negative impact of the new coronavirus on Italian covered bonds and CMBS is limited so far, said Moody’s and DBRS in reports published on Friday and Monday. But if the outbreak spreads, the ability to repay covered bonds would be impeded with serious consequences.

Nomura's head of sovereign, supranational and agency, covered bonds and financials trading has left the bank.

Spreads on covered bonds are likely to gap a few basis points wider when the market reopens for business. There was no issuance this week amid fears about the spread of the Covid-19 coronavirus, but a German issuer could land a benchmark deal if government agencies are able to lay the groundwork in the primary market, bankers said on Friday.

Financial markets weakened further on Thursday, as the economic impact of the Covid-19 coronavirus epidemic scotched any chance of primary market activity, said bankers. A period of stability is necessary before new issuance can restart, they said, at which point covered bonds will be the product of choice.

Banks are delaying their plans to raise funding in the euro market, as credit spreads drifted wider on news about the spread of the Covid-19 coronavirus.

UK covered bonds looked cheap, said traders on Tuesday, especially relative to Canadian and Australian alternatives. Their views followed a report from Moody’s which said on Monday that UK banks’ credit fundamentals were resilient and their covered bond ratings well protected.

Covered bonds were steady on Monday, with spreads reacting stoically in the face of mounting volatility in the credit and equity markets, which were hit by fears over the spread of the Covid-19 coronavirus. But with key covered bond investors only expected to return to their desks on Wednesday, following Germany’s carnival season, market participants remain braced for a delayed reaction in the asset class.

Intense demand in the Swiss franc bond market for any asset with a positive yield — or even anything yielding more than the penal negative rates on cash — gave a varied group of issuers this week execution that pushed the boundaries — bigger, faster and tighter.

Santander went up against Crédit Agricole with a 12 year covered bond on Thursday. Although the Spanish lender announced its deal after the French bank, a generous start ensured Santander sucked demand from the French deal, which was also hurt by a lower than expected European Central Bank order. Santander also issued a deeply negative yielding five year that attracted excellent demand.

Luminor Bank has mandated leads for the first covered bond from the Baltic region.

Crédit Agricole SFH took advantage of a quiet market, mandating lead managers on Wednesday for a mortgage backed covered bond with a rare 12 year tenor. The prospective deal emerged after S&P published an upbeat report on the French covered bond market.

Traders told GlobalCapital this week that low yield levels were ‘starting to become a problem’ for covered bond buyers, following a sustained rally in rates, adding that it was extremely hard to find offers on bonds in many parts of the market.