Covered Bonds

Peripheral covered bond spreads were marked tighter on little volume on Monday, in line with a general improvement in risk appetite across the credit spectrum after a number of polls showed a swing in favour of the UK remaining in the European Union. But with opinion more evenly balanced than ever, the market has probably overreacted.

PKO Bank Hipoteczny, Poland’s largest mortgage lender, has issued its second covered bond since the country’s updated legal framework came into force. The well oversubscribed, tightly priced and broadly distributed deal sets a strong prelude for an expected inaugural euro benchmark later this year.

Capital markets this week finally faced up to the possibility of the UK voting to leave the European Union in next Thursday’s referendum. There was a distinct whiff of panic in European bond markets, after latest polls showed the Leave campaign was not only gaining momentum but establishing a lead, prompting investors to race into safe haven assets such as Bunds and US Treasuries and selling out of bonds of issuers most likely to be affected by Brexit.

Stadshypotek was lucky to raise €1bn of six year funding at 3bp over mid-swaps on Monday, a feat that leads said would not have been possible on Tuesday as markets deteriorated.

Caisse Française de Financement Local (Caffil), the French public sector bank, issued its third Obligation Foncière this week but, while it set a record low coupon, it was heavily reliant on support from the Eurosystem.

Covered bond volumes were higher this week than last even as mounting fears of a UK decision to leave the European Union lead to greater volatility and increased execution risk.

Turkish banks are looking to mortgage-backed covered bonds to close asset and liability mismatches and reduce borrowing costs. In the next few years, the asset class will become a cornerstone of their funding plans.

The Swedish covered bond law requiring issuers to hold a minimum overcollateralization ratio of 2% is expected to come into force on June 21.

The Australian lender priced an A$500m five year floating rate covered bond on Wednesday on an oversubscribed order book. Though it was unable to tighten pricing, the final spread was in line with the last five year A$ benchmark issued by CIBC.

The Danish covered bond issuer extended its curve and priced a larger deal well inside where its inaugural five year was issued in March and with a fair oversubscription ratio.

FIG spreads have come under pressure this week, with nervousness creeping into the market following new polls on the UK’s referendum on EU membership.

Independent covered bond consultant, Richard Kemmish, responds to the Bundesbank’s discussion paper on covered bond asset encumbrance.