Covered Bonds

Toronto Dominion had less luck than its Canadian peers when it issued the third sterling Canadian covered bond of the year this week. Even though the transaction offered a hefty concession there was only sufficient demand to issue in half the size of the previous deals.

Covered bonds issued this week by Axa Bank and Lansforsakringar Hypotek (LF Hyp) were priced at — or inside — fair value, partly reflecting a technical squeeze that was aggravated by the European Central Bank’s move to step up purchases in the secondary market.

The European Central Bank has stepped up secondary covered bond purchases to compensate for slower primary activity and has exacerbated a technical squeeze. But with the central bank expected to announce a tapering of asset purchases after summer the squeeze could reverse, and spreads could end the year much wider.

Lansforsakringar Hypotek (LF Hyp) has issued its longest dated covered bond which, with a positive spread to mid-swaps, gives a slight premium to other Swedish banks but no concession to its own curve.

Austria’s Hypo Noe and Poland’s PKO Hipoteczny have mandated leads for roadshows that begin in mid-March and which are likely to be followed by deals.

Axa Bank has priced its largest covered bond in almost five years at the tightest spread it has ever achieved and inside fair value. The choice of tenor, timing and final spread were instrumental in the successful outcome.

Toronto Dominion became the third Canadian bank to issue a sterling covered bond benchmark this year with a deal launched on Monday. Despite an attractive spread, the book was slow to build and the deal size looked set to be smaller than average.

The European Covered Bond Council (ECBC) said it will begin meetings with national authorities and stakeholders in India and Malaysia to consider whether covered bonds could play a role in their economies.

Covered bond primary supply is likely to improve, but will not be enough to sate investor appetite. With dealer inventories low, the technical squeeze will tighten, even as an unwinding of the flight to safety bid caused Bunds to fall sharply on Friday.

DG Hyp enjoyed solid demand for a long nine year Pfandbrief deal this week as, despite the measly new issue concession, it offered an unusually high pick-up against Bunds.

As the first non-German bank in the eurozone to price a €1bn covered bond in over a month, OP Mortgage Bank was perhaps overly careful with its initial approach to pricing. But the plan paid off.

Despite the ECB’s backstop bid, covered bond trading is a tough business. Tight spreads may help investors score mark-to-market gains, but discourage them selling since replacement assets are scarce. But the market is evolving, e-trading is on the march and traditional dealer rankings are changing too.