Covered Bonds

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.

After selling a green mortgage-backed covered bond to the International Financial Corporation and the European Bank for Reconstruction and Development (EBRD), Garanti Bank expects to sell its first publicly syndicated euro benchmark.

After selling $150m of green residential mortgage-backed covered bonds to the International Financial Corporation, Garanti Bank expects to sell another deal to the European Bank for Reconstruction and Development.

Canadian Imperial Bank of Commerce issued a $1.75bn five year dollar covered bond on Thursday, its first since 2015 and the third of the same size and tenor from a Canadian bank this year.

Market participants await this Thursday’s European Central Bank meeting for clues on a tapering of asset purchases, which has in fact already begun in covered bonds. But for now, spreads remain tight.

It’s hard to attack green finance, because its aims are so noble. But when institutions use environmental aims to argue they deserve special subsidies, it tarnishes the whole market. Prudential regulation should stick to being prudential.

DBRS on Tuesday announced a methodology for rating transactions backed by public sector loans, a move that may help Portuguese issuers access cheaper repo funding.