Covered Bonds

Nordea issued a €1bn seven year bond on Thursday and attracted the highest subscription ratio of any euro covered bond of this size in 2018, while pricing with a tiny new issue premium. The execution offers further evidence that covered bonds are on a solid footing, in contrast with other sectors.

Deutsche Pfandbriefbank (PBB), which completed its second euro benchmark Pfandbrief of the year this week, is expected to consider issuance in dollars or sterling, as are other German issuers that have big foreign currency assets.

If the principles-based European covered bond directive is implemented in its current draft form not a lot will change — but that may be just as well.

Deutsche Pfandbriefbank (PBB) priced an Aa1 rated six year Pfandbrief on Tuesday at the same spread as Deutsche Bank’s Aaa rated five year issued last week, showing the market has improved. But, with tighter monetary policy recently signalled and more supply due, the advantageous funding window may prove short lived.

The Pfandbrief market may at last be stabilising after almost 18 years of contraction. And with the share of mortgage Pfandbriefe growing and peripheral exposure shrinking, collateral quality has improved. The market is set to evolve as new names emerge, others merge and some disappear.

Austria's Oberbank has mandated leads to roadshow its first covered bond.

The Italian Obbligazioni Bancarie Garantite market has barely reacted to the growing probability that an anti-European coalition between the Five Star Movement and League parties could soon be announced. Even though OBGs are expensive relative to senior unsecured and sovereign bond markets, spreads could well hold steady unless there is a considerable improvement in supply.

Pfandbrief borrowers rarely issue sterling deals of more than £250m, so when LBBW priced a £750m transaction with demand of £1.4bn this week, alarm bells were ringing. The astounding wall of money chasing the safest of safe assets may say as much about the state of the market as it does about the value of the deal itself.

Next week will be the first and only full business week of the month. With spreads having stabilised, a broad range of issuers are expected to take advantage of the funding window, not least because of some concerns that credit conditions could deteriorate later in the year.

At £750m, the debut sterling covered bond issued by LBBW on Wednesday was by far the largest ever of its kind sold by a European bank, with the trade attracting demand that was off the scale compared with anything that had previously been issued in the currency.

Covered bond investors say that, in isolation, their market looks in good shape. The trouble is, US equities and Treasuries are looking overvalued and a sell-off there could well spark a rout in global credit markets which will invariably hit covered bonds.

Covered bond deals issued on Tuesday by Deutsche Bank and Hypo Oberösterreich offered concessions of less than 2bp, illustrating that spreads have stabilised. With supply likely to remain low over the next few weeks, the more supportive backdrop should persist.