Covered Bonds

Why not pass legislation for covered bonds in the United States? It is easy to do and there is basically no cost to the Treasury, says Jerry Marlatt senior council at Morrison & Foerster LLP in New York.

Funding activity is likely to resume next week, but in the meantime, Greek debt negotiations will take the main focus. RBS’s research team believes the market has overestimated the risk of a Greek euro exit, particularly given the pivotal role it plays in the US-European strategy to isolate Russia. The analysts are bullish on southern Europe which suggests peripheral long dated covered bonds should outperform.

Covered bond yields continued to tumble this week with coupons from German and French euro issuers skimming just above zero, at 0.025% and 0.125% respectively. Meanwhile, in Switzerland the first Swiss franc covered bond was issued with a negative yield of 0.37%. The deals may be good news for the issuers concerned, but investors are hurting. And by forcing them down the credit curve the seeds of the next crisis are potentially being sown.

The European Central Bank now holds 12% of euro area outstanding benchmark covered bonds, which are not available for repo, and have been bought at a time of rising structural demand and falling net issuance. As a result, the ECB’s actions have made a bad liquidity situation much worse, said Barclays covered bond research in a report on Thursday.

20 covered bond issuers defaulted in the 10 years to the end of 2013, but no covered bond experienced a default, said Moody’s in a special comment on covered bond rating transition rates. Covered bond ratings, which exhibited a lower rate of downgrades than issuer ratings, began to stabilise in 2013

Scope Ratings has taken a big bet on the success of Europe’s bank resolution scheme with its covered bond rating method, published for comment on Thursday. Compared to the main rating agencies, Scope drastically downgrades the importance of covered bond collateral.

Covered bond yields continued to tumble this week with coupons from German and French euro issuers skimming just above zero, at 0.025% and 0.125% respectively. Meanwhile, in Switzerland the first Swiss franc covered bond was issued with a negative yield of 0.37%. The deals may be good news for the issuers concerned, but investors are hurting. And by forcing them down the credit curve the seeds of the next crisis are potentially being sown.

Covered bond issuer PS Hypo sold the first syndicated Swiss franc bond with a negative yield on Wednesday as part of a Sfr965m ($1.0bn) four-tranche deal.

An incredible streak of record breaking low yields skipped through the covered bond market this week as issuers from Germany and France set new records, while another outside the Eurozone issued the first deal longer than 10 years with a coupon below 1%. Despite the low level of return, investors piled into all three euro transactions.

NordLB has issued a four year public sector backed Pfandbrief on a very well oversubscribed book at the lowest ever coupon and at an extraordinarily tight spread. The deal, which comes in the bank’s 250th anniversary, is likely highlight relative value to the planned issuance of its inaugural benchmark Lettre de Gage, which will also be backed by public sector assets.

National Australia Bank issued its first euro benchmark covered bond of the year, and by choosing a maturity that would offer investors a relatively attractive yield, the issuer ensured a strong reception.

Scope Ratings has issued a request for comment on its approach to rating covered bonds, which takes special account of the Bank Recovery and Resolution Directive. This should mean strong banks can get a top covered bond rating without necessarily taking into account the cover pool, as recourse to the pool is considered “extremely remote.” And because the agency does not set a sovereign rating cap, peripheral issuers should be able to get a top covered bond rating.