Covered Bonds

The European Central Bank (ECB) likes to keep up the idea that it dips in and out of markets judiciously with its quantitative easing programme. This is disingenuous. Its driving force is its need to pump money into the system.

Swiss Pfandbriefbank issued a Sfr1.1bn (€1bn) three part deal on Monday which was notable for both its size and the tight spread achieved.

Commerzbank took advantage of a rise in yields to launch a nine year Pfandbrief on Monday. With yields rising 6bp overnight amid an improvement in risk sentiment, bankers suggested a positive yielding long seven year can expect a fair reception.

The mandatory buy-in regime under the EU’s regulation for central securities depositories (CSDR) is expected to cause bid-ask spreads across bond markets to widen significantly, according to a warning from the International Capital Markets Association. The lobby group would like the rules changed.

Nasdaq has developed a new method for pricing Danish covered bonds, which are typically more difficult to price than fixed-rate euro deals because of prepayment risks of mortgages in the underlying pool and negative convexity associated with callable deals.

Virgin Money revealed in a presentation on Thursday that its cost of funding had risen by 31bp in the last year, as the UK lender looks to replace central bank money with financing from the capital markets.

Crédit Agricole and Santander raised a combined €3bn of 10 year covered bond funding on Wednesday, with joint demand of over €5bn. Both deals were special in their own right, with the Spanish deal paying a rare double digit spread over mid-swaps, while the French borrower’s inaugural green transaction will have drawn a rich new seam of demand from buyers with a green investment mandate.

Covered bond investors have had a stellar year but are unlikely to match that performance in 2020. They will be relying upon healthy new issue premiums and a steady supply of higher yielding, non-standard deals to stand a chance of making good returns.

The European Central Bank has been increasing its proportion of covered bonds relative to other assets bought through its asset purchase programme (APP). Bank research analysts expect that the ECB’s presence will be even more keenly felt in 2020, with covered bond redemption volumes set for a steep increase and with the central bank free to buy at levels below the discount rate.

Raiffeisen Bank International (RBI) managed to attract a convincing order book for its debut covered bond issued on Monday following a roadshow, largely thanks to the rare double-digit spread it paid over mid-swaps, and the compelling pickup compared to its Austrian peers.

Pfandbriefzentrale issued its largest ever bond this week, a Sfr1.386bn ($1.398bn) triple-tranche deal that included a Sfr980m 12 year tranche that was itself the largest single issue in the Swiss franc bond market this year.

Covered bond spreads were holding steady on Thursday as bank traders lighten their balance sheets amid modest secondary market buying from the European Central Bank (ECB), ahead of Crédit Agricole and Nordea’s inaugural green transactions and Raiffeisen Bank International’s vanilla debut.