Covered Bonds

The European Banking Authority has published final recommendations that set out the details of its three step approach to harmonising covered bonds across Europe.

The technical outlook for French covered bonds is likely to support spreads, but this could be undermined by a more precarious political backdrop as elections draw near.

As well as creating the legal conditions to allow the issuance of senior non-preferred debt, France’s Sapin II legislation brought in changes that will further harmonise the treatment of French Société de Crédit Foncier (SCF) and Sociétés de Financement de l’Habitat (SFH) covered bond structures.

Pfandbriefbank Schweizerischer Hypothekarinstitute tapped two Swiss covered bonds on Tuesday, in what was likely the final trades of the year. The shorter 10 year Pfandbrief tenor offered a 0.29% yield, an early Christmas present to investors forced far along the curve throughout the year.

The covered bond market is expected to shrink by around €12bn in 2017, according to analysts at BBVA.

Eight heads of funding and two DCM heads spoke to GlobalCapital about covered bonds and regulatory funding, the impact of the Term Long Term Refinancing Operation, the prospective end to the covered bond purchase programme and likelihood of limited funding windows next year.

Global political upheaval and rising dollar interest rates are likely to make 2017 a year of brief issuance windows in covered bonds. GlobalCapital gauged the views of a number of funding heads and senior bankers on their approach to the market for the year ahead.

Deutsche Bank’s Spanish subsidiary kept its commitment to issue around €2bn of Cédulas a year and on Wednesday launched a well-oversubscribed €1bn five year, even though the cost was much higher than the European Central Bank’s Targeted Long Term Refinancing Operation.

There is too much diversity in covered bond legal and supervisory frameworks to justify special regulatory treatment of all regimes and programmes, said Christian Moor, a policy adviser with the European Banking Authority, at the AFME and VDP covered bond conference in Berlin.

The covered bond market remained in good shape in the immediate aftermath of the European Central Bank’s policy meeting on Thursday. Even though it had signalled an intention to reduce the amount of monthly purchases next year, peripheral bonds were tighter on the day.

Deutsche Bank’s Spanish subsidiary kept its commitment to issue around €2bn Cédulas per annum and on Wednesday issued a well-oversubscribed €1bn five year, even though the cost was much higher than the European Central Bank’s Term Long Term Refinancing Operation.

The focus was firmly on Italy this week. Despite the government’s failure to secure support for constitutional reform and the resignation of prime minister Matteo Renzi, financial bonds rallied across the board as shorts were covered and new risk was added.