Covered Bonds

Despite the unexpectedly positive market tone on Thursday, bankers say that euro benchmark covered bonds are unlikely next week, as new issue premiums would need to be hefty. Several issuers are lining up for sub-benchmark trades however, and the sterling and dollar markets remain a possibility.

The German Pfandbrief market continues to shrink, driven by a decline in the public sector, which is now almost the same size as the growing mortgage sector, according to the first quarter cover pool data recently published by the Association of German Pfandbrief banks (VDP).

The European Covered Bond Council has proposed a new generation of secured funding notes, halfway between covered bonds and securitizations. But getting them off the ground is still in the hands of the regulators.

The long end of the French, Belgian and Dutch covered bond market is in effect closed for primary issuance because it is too expensive compared with government bonds.

The Bund correction has driven mid-swaps rates higher across the curve to the point that short dated German Pfandbriefe now offer a positive yield.

Just one small covered bond emerged from newcomer Natixis Pfandbriefbank this week, while several others mandated for sub-benchmark deals.

The European Covered Bond Council has proposed a new generation of secured funding notes, halfway between covered bonds and securitizations. But getting them off the ground is still in the hands of the regulators.

With the back-up in Bund yields driving the mid-swaps rate higher, all three year German Pfandbriefe now offer a positive yield. However, while the three year tenor is back on the table, the improvement is marginal and the five year remains more optimal.

Sterling covered bonds offer an attractive spread pick-up compared to euros according to Pimco’s covered bond portfolio manager, Timo Boehm, who took part in the Crédit Agricole covered bond round table, Living With A Covered Bond Shortage and The Big QE Squeeze. The French bank’s research analysts agree, and said this week that sterling offers among the best returns in the covered bond market.

Fitch has put the £1.1bn of covered bonds issued by Clydesdale Bank on Rating Watch Negative (RWN) after its parent National Australia Bank said it intended to proceed with a sale of its subsidiary.

The European covered bond market was relatively quiet on Wednesday with one deal emerging from newcomer Natixis Pfandbriefbank. Meanwhile, Moody’s rated the covered bonds of another newcomer, Norway’s SR-Boligkreditt. But neither issuer is likely to offer benchmark sized euro issuance, the outlook for which remains contingent on the rates market.

Bund-ageddon may be striking fear into the hearts of traders and investors across Europe. On paper, the price moves are brutal but calm is called for.