Covered Bonds

With yields set to rise and spreads likely to widen, covered bond issuers should waste no time in getting ahead on 2017’s funding plans and doing the more difficult trades first.

Commonwealth Bank of Australia swept up remaining demand in the now saturated five year sterling covered bond market on Thursday, while Deutsche Pfandbriefbank (PBB) got a fair reception for the first three year floating rate covered bond of the year.

Coventry Building Society received a strong reception for the first euro-denominated covered bond from a UK issuer since the UK referendum to leave the European Union. Despite cheaper funding alternatives, the deal demonstrated Coventry’s strategic commitment to the euro market.

Euro covered bond issuers came to the market in size across a range of tenors on Thursday morning, as Compagnie de Financement Foncier (CFF) landed a €1.5bn six year deal and Helaba drew €2bn of funding with a five and 10 year Pfandbrief issues.

ABN Amro issued its third 15 year covered bond in three years on Wednesday and, in a surprise late addition, tacked on a sub-benchmark 20 year.

Royal Bank of Canada took advantage of deeper demand for fixed rate paper than floating in sterling covered bonds, issuing a five year trade on Wednesday. RBC has gathered more demand for its deal than Canadian Imperial Bank of Commerce, which issued a floating rate deal a day before.

DNB Boligkreditt got the Nordic covered bond market off to a blistering start on Wednesday with a €2bn five year deal that leads were able to tighten by 5bp from initial guidance.

With yields set to rise and spreads likely to widen, covered bond issuers should waste no time in getting ahead on 2017’s funding plans and doing the more difficult trades first.

Four covered bond issuers returned to the market on Tuesday with the first deals of 2017. Two €1.5bn 10 year transactions showed that borrowers are prioritising the tougher, longer duration deals and, while conditions permit, issuing in large size.

Covered bonds will continue to be a crucial instrument in any bank treasurer’s funding tool kit in 2017. However, the more necessary focus will be on bail-inable senior unsecured funding. Bill Thornhill reports.

At around €10bn Canadian banks are expected to issue the highest net volume of euro-denominated covered bonds in 2017. And, given high dollar redemptions, a favourable cross-currency swap and an active mortgage market, supply could even beat expectations.

Germany is likely to lead gross supply of covered bonds next year, and many analysts are forecasting it will see its first proper net increase in years. Even so, the market is likely to remain well supported.