Covered Bonds

The low level of liquidity in the secondary covered bond market is being reflected by European Central Bank data, which shows daily purchases have fallen to one of the lowest levels since its programme begun.

After a decade of growth, the global covered bond market has shrunk in the last two years, but steep falls in European supply have almost been matched by growth in other markets.

After widening substantially in the run-up to the UK referendum on EU membership, UK covered bonds have now found a base with dealers reporting better buying and analysts recommending overweight positions. Spreads should remain supported, along with those in peripheral Europe, as supply is likely to be very limited over the remainder of this year.

GE Money Bank in France on Friday offered up extra spread on the subordinate tranche of its €850m French RMBS deal, the first publicly placed deal in the asset class since July 2015.

Reviving the UK RMBS market in the aftermath of the country’s vote to leave the European Union is seen as key to maintaining issuance levels in European ABS – but despite steady secondary trading and a market reopening deal, it is far from clear that this is possible.

Covered bonds not eligible for the European Central Bank’s covered bond programme (CBPP3) have been sought after in the secondary market, largely reflecting the fact that offers for CBPP3-eligible paper have become almost impossible to find.

The Market Abuse Regulation (MAR), which came into effect this month, is open to many different interpretations, undermines deal execution certainty and complicates the flow of information.

The Slovak covered bond market is too restrictive to provide proper funding but Moody’s expects the country’s covered bond law to be changed in the near future, which should gradually pave the way towards greater covered bond supply.

Clydesdale Bank reopened the UK RMBS market with the first deal following the UK referendum and paid double the spread of its previous deal. GE Money Bank in France is expected to finalise its RMBS on Friday.

The VDP’s newly appointed president, Dr Louis Hagen, has some strong, clear cut views on a wide range of topics affecting both the Pfandbrief and covered bond markets. He talks to The Cover about the implications of Brexit, covered bond supervision in the banking union, the Net Stable Funding Ratio, the leverage ratio, soft bullet extensions and harmonisation.

Canadian Imperial Bank of Commerce this week priced the first negative yielding non-Eurozone covered bond, with a well oversubscribed order book and a tiny new issue concession.

Commonwealth Bank of Australia drew more demand than any other euro denominated Australian covered bond in over three years when it issued a €1.25bn 10 year this week.