Covered Bonds

Covered bond sentiment improved on Tuesday in line with the wider credit market and despite negative rating actions on the UK sovereign. Technical factors are likely to continue to support spreads over the next few weeks. Though weak UK fundamentals could lead to issuer downgrades in the longer term, covered bond ratings are relatively well protected.

In the devastating aftermath of Friday’s UK referendum result, UK covered bonds have been marked wider in contrast to peripheral national champions that have benefitted from some short covering interest at the long end.

Bank investors of Norwegian and Swedish covered bonds will be obliged to hold more capital against their investments from next week. Though this is likely to have implications for a considerable number of noteholders, the absolute change is small and is unlikely to affect demand, said analysts at Danske Bank research.

The covered bond market was almost impassive to the wider credit market turmoil that followed the UK vote on Thursday to leave the European Union, with the primary market likely to restart in early July. But one major investor said the UK's decision will be worse for peripheral economies as it will trigger a lot of uncertainty about the EU as a whole.

The covered bond market reacted stoically to the surprising outcome of the UK’s referendum to leave the European Union with the primary market expected to restart in two weeks.

Investors have agreed to a number of changes to Nationwide Building Society’s covered bond programme. The publication of voting results in full is in line with the European Central Bank’s recommendation — but something that is still rarely seen in the market.

The deadline for submitting bids for the European Central Bank’s targeted long term refinancing operations (TLTRO II) is due at the same time as the UK EU referendum result. SEB analysts anticipate borrowing will be higher than the median forecast and think this will help alleviate potential Brexit related spread widening.

Compagnie de Financement Foncier (CFF) has updated its EMTN Obligations Foncières programme documentation to permit issuance of soft bullet covered bonds, bringing its deals into line with most others. The move comes as Germany considers updating its law to allow for soft bullet extensions.

PKO Bank Hipoteczny, Poland’s largest mortgage lender, has issued a well oversubscribed, tightly priced and broadly distributed covered bond, which sets an encouraging prelude for an expected inaugural euro benchmark deal later this year.

When the covered bond purchase programme (CBPP3) began in October 2014, valuations had become severely overstretched, and not long after the purchasing began, the market came under considerable pressure. Valuations are once again looking overstretched across the board but more so in the corporate sector where eurosystem buying has also only just begun.

From a regulatory standpoint the spread level of UK covered bonds suggests a UK exit from the European Union has been priced in. However, given uncertainty over how the process of leaving the Union would be finally completed, it is likely UK bonds will remain unloved.

When the covered bond purchase programme (CBPP3) began in October 2014, valuations had become severely overstretched, and not long after the purchasing began, the market came under considerable pressure. Valuations are once again looking overstretched across the board but more so in the corporate sector where eurosystem buying has also only just begun.