Covered Bonds

Market analysts reacted positively this week to the Spanish Treasury’s Cédulas consultation, but the thorny question of how the market will transition to the new regime has potentially negative implications.

Covered bond spreads jumped wider on Monday in response to even sharper moves in the credit market. The selling was modest in volume and, with market makers protecting their bids, trades were done far wider than indicative levels.

Bond issuers returned to the primary market this week showing greater resilience than many expected. The intense gyrations gripping underlying rates and equities mean that deals are likely to be far from easy to do for some time as the effects of the Covid-19 outbreak grip global markets.

Eika Boligkreditt this week placed the most deeply negative yielding non-German covered bond since credit market volatility spiked two weeks ago. The deal, issued on Thursday, will help participants gauge just how far spreads have moved, setting the market up for more active issuance in March when demand is expected to materialise on the back of a considerable widening in the Bund/swap spread.

Luminor Bank attracted strong demand for its debut covered bond on Wednesday, the first under Estonia’s legal framework and the first from the Baltic region. Despite a negative reoffer yield, it attracted a higher subscription ratio than any other five year euro benchmark issued this year.

Commerzbank reopened the covered bond market on Tuesday by pricing its largest Pfandbrief in a decade, following a meltdown in global finance last week.

Luminor Bank is expected to issue its debut covered bond after successfully concluding a roadshow this week. The deal will be the first Baltic covered bond under the Estonian legal framework.

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.