Covered Bonds

Navigating the covered bond market will not be without its challenges in 2020. The Targeted Longer Term Refinancing Operation (TLTRO), European Central Bank deposit tiering and the Covered Bond Purchase Programme have collectively distorted the market, but added to this concoction is the impact of negative interest rates. Against this backdrop issuers, investors and investment bankers gathered in Munich in November to discuss the outlook for covered bonds. It is likely that new issue premiums will gradually tighten, but the path is unlikely to be smooth. January is typically the busiest month, but in 2019, issuers that funded this early paid the highest spreads. And, with the ECB expected to buy in the region of €4.5bn covered bonds a month, issuers will not feel compelled to move early. But the ECB monetary policy has unwelcome implications. Covered bonds have begun to lose value against government bonds, and this will extend if the ECB is unable to loosen restrictions on government bond purchases.

Analysts at Commerzbank have criticised Markit for excluding Deutsche Bank’s innovative conditional passthrough covered bond from the iBoxx index for covered bonds. They believe the decision is “technically difficult to justify” and could discourage other banks from embracing new formats.

GlobalCapital looks back over 2019 to assess the best euro covered bonds and banks, as rated by its Covered BondMarker. The best deals were from Lloyds, Santander and Rabobank. The best lead managers were BNP Paribas, ING and Natixis.

Compelling evidence emerged this week showing how much liquidity local investors are still looking to deploy in the Swiss franc market as the year’s end looms. On Monday, it took just 45 minutes for books to open and close on three clips of Pfandbriefbank paper.

The Association of German Pfandbrief banks (VDP) has criticised a Berlin local government decision to cap rents, which it believes will hit investor confidence and lower construction activity. Despite these concerns, the outlook for Pfandbrief supply is positive and remains underpinned by solid fundamental factors.

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.