Covered Bonds

The European Banking Authority (EBA) has questioned whether banks will be able to place large quantities of new debt into the capital markets for the minimum requirement for own funds and eligible liabilities (MREL), with issuance volumes set rise in 2018 and 2019.

Jozef Prokes, fixed income portfolio manager at BlackRock talks to GlobalCapital about the outlook for yields, swaps and the relationship between covered bonds and senior spreads.

Arnaud-Guilhem Lamy, portfolio manager and head of covered bonds at BNP Paribas Asset Management, speaks to GlobalCapital about the outlook for covered bond spreads, monetary policy and the market’s interaction with senior preferred and non-preferred.

The covered bonds issued by European banks that are being wound down are no longer eligible for the covered bond purchase programme (CBPP3) and wind down entities will not be eligible for repo funding from 2022. The measures dovetail with others that will hit covered bonds with extendable maturities, in addition to those retained for repo purposes.

Rates volatility is expected to continue and, with the long end being disproportionately affected, DZ analysts are urging investors to shorten duration.

Bondholders have been left between a rock and a hard place, according to one investor, after Novo Banco published the terms of its liability management exercise (LME) this week.

Covered bond issuers in Europe’s periphery should wake up to the fact that current spread levels are artificially tight and unsustainable. The first bank that recognises and takes advantage of this will have a distinct advantage over its competitors.

Although Obbligazioni Bancarie Garantite (OBG) supply has been limited this year, the universe of borrowers is set to expand as Fitch assigned a rating to a programme for Banco di Desio e della Brianza’s (Desio) in the expectation of a €500m deal.

Türkiye Halk Bankasi (Halkbank), the Turkish state-owned lender, has confirmed that it plans to issue mortgage-backed covered bonds. It joins seven Turkish lenders that have rated covered bond programmes in place.

Government support for Banca Carige is becoming more probable, boding well for its covered bonds, which are the cheapest available in Europe. But limited liquidity in these and other eurozone bonds makes it difficult to execute trades, in stark contrast to non-eurozone bonds.

Financial institutions have already eclipsed last year’s total supply volumes in the sterling bond market, as international borrowers have piled into the currency to take advantage of impressive issuance conditions.

The slightly dovish policy statement that followed Thursday’s European Central Bank policy meeting caused the Bund-swap spread to widen, restoring a little value in covered bonds. But the spread is still a long way from the widest levels of last month and, if the spread tightening resumes, covered bond sellers could come out in force just as post-summer supply hits the screens.