Covered Bonds

Covered bond primary volume is expected to slow from the exceptionally busy period seen over the last two weeks, though a number of issuers are still monitoring conditions. In the meantime, market participants will be heading to Vancouver for the European Covered Bond Council’s plenary meeting and Euromoney Conference’s North America Covered Bond Forum.

The belly of the covered bond curve is soft with offers easy to find. Traders are hopeful that spreads will stabilise after next week’s slew of issuance but confidence is lacking. Yet there are pockets of performance if you look hard enough.

Covered bonds issued by Swedish Covered Bond Corp and Overseas Chinese Banking Corp on Wednesday were thinly oversubscribed though investor preference was clearly slanted towards the most defensive five year Swedish offering.

The head of covered bond origination at Société Générale is expected to leave the bank this week and is also relinquishing his role as deputy chairman of the European Covered Bond Council (ECBC).

Legacy capital securities are proving rich pickings for specialist bank debt investors as institutions work out how to take them out of their funding structure. Meanwhile, covered bond investors are wary about their market.

A trio of covered bonds issued on Tuesday attracted tepid overall demand, even though they were priced much wider than theoretical fair value. Of the three, Axa Bank’s dual tranche offering stood out as the most popular.

Virgin Money could soon appear with a debut covered bond after Fitch and Moody’s assigned top ratings to its €7bn programme with the expectation of a £500m five year soft bullet deal.

Bank of Montreal raised £400m ($569m) of five year funding in covered bonds on Monday following £1bn deals from Santander UK and Nationwide last week. But with fewer sterling covered bonds redeeming after this month, primary activity is expected to slow down.

Commerzbank reset the pricing of its covered bond curve to a more realistic market clearing level with its €500m 10 year on Monday, as Erste Group, HSBC, Axa Bank and mBank Hipoteczny announced deals.

Santander UK found strong demand for a three year floating rate sterling covered bond on Friday and will be followed by Sparebank 1, which has mandated leads for investor meetings with a view to issuing a sterling five year. At the same time, SBanken Boligkreditt has mandated leads for a roadshow with a view to issuing its first euro deal.

Covered bonds issued this week by Compagnie de Financement Foncier (CFF), ABN Amro and ING Bank offered premiums well in excess of any other seen this year. The three deals repriced the secondary market and set a pattern that is likely to become more established over time.

The European bond market this week finally showed its first acknowledgement that the end of European Central Bank (ECB) quantitative easing (QE) is nigh. Opinions are still split as to whether the bond buying will end in September or be extended to December, but new issue pricing has stepped wider regardless, write Nigel Owen and Bill Thornhill.