Covered Bonds

SR Boligkreditt issued a euro covered bond on Monday and, for the first time in its history, was able to price in line with Sparebank 1 Boligkreditt (Spabol). However, its hopes of issuing more than its usual €500m size were dashed.

Covered bonds issued this week by Berlin Hyp and Deutsche Hypo would have struggled without demand from the European Central Bank, suggesting the central bank is crowding out investor demand from the private sector.

A broad and diversified group of investors placed large orders for ING Belgium’s €1.25bn 10 year covered bond issued on Thursday, lapping up its positive reoffer yield and the convincing spread pick-up, as well as the rarity and strength of the name. The resounding response stood in contrast to two tightly priced negative yielding Pfandbriefe issued earlier this week.

ING Belgium has mandated lead managers for its first covered bond since September 2018 and its fifth since the programme’s inception in 2013. The prospective deal may just avoid being issued with a negative yield, but it’s a close call.

Some recent covered bond issues would have barely have made it over the line without the European Central Bank’s help. Meanwhile, valuations are elevated. But the market still looks attractive compared with unsecured credit, a leading investor told GlobalCapital on Wednesday.

Luis Muscatt, formerly of NatWest Markets, has joined BMO Capital Markets as a covered bond and SSA trader.

Deutsche Hypo was unable to tighten pricing as much as it had hoped for a seven year Pfandbrief it issued on Tuesday. Demand was sufficient to cover the deal, excluding the European Central Bank's order, but only just enough, giving investors more power to resist spread cuts.

In January the European Central Bank bought more covered bonds as a proportion of net asset purchases than at any time in the past five years. That should stand it in good stead for the lean months ahead when supply will fall but redemptions will be even higher.

Berlin Hyp was unable to tighten pricing as much as it wanted for its seven year Pfandbrief on Monday, showing that a steep fall in yields this year is having a direct impact on the primary market. The transaction provided a clear warning to issuers who believe they should be able to price deals flat to their outstanding curves.

Deutsche Hypo has mandated lead managers for a Pfandbrief deal, choosing the same seven year maturity that Berlin Hyp opted for on Monday.

A trio of transactions issued this week by Santander UK and Nationwide Building Society have opened two new funding channels for UK issuers. The dollar covered bond market is now back as a strategic funding tool after a near 10 year absence and, for the first time, sterling seven year floating rate covered bonds are a viable funding option.

Cracks started to appear in demand for long-dated rates products this week, even as riskier credit markets went gung-ho in the face of the coronavirus outbreak. Now Spain could be set to test how bad the damage has been, as it is rumoured to be readying a 30 year syndication for next week. Burhan Kahdbai, Lewis McLellan and Bill Thornhill report.