Covered Bonds

The covered bond market continued to perform on Wednesday, but the shortage of paper has led to a deterioration in liquidity, and this is starting to outweigh the positive sentiment that had been driven by an improvement in relative value. The supply situation is not expected to improve much until late next week, when the German carnival season is over and Pfandbriefe could emerge.

NAB has mandated joint leads for the second euro denominated Australian covered bond of the year. A long dated transaction is envisaged and books are expected to open on Thursday.

Moody's assigned a provisional rating to the Turkish Lira-denominated covered bonds of Akbank, raising hopes that the first such deal from the region will soon be seen.

Compagnie de Financement Foncier (CFF) priced the tightest and lowest yielding euro benchmark covered bond from a non-German issuer on Tuesday. The strong result is a testimony to the return of relative value and shows that, despite the historically low absolute yield, investors are desperate for covered bonds which are structurally under-supplied, but for which there is a durable regulatory bid.

The Swedish regulator’s proposal to lower the covered bond swap counterparty rating threshold to single A from double A is credit positive, said Moody’s on Monday. Though at odds with overall European covered bond rules in the Capital Requirements Regulation and Directive, the proposal would allow banks to continue receive preferential regulatory treatment on their covered bond investments.

Nationwide Building Society will begin meeting buyers at the ABS Vegas conference on Monday where it is marketing a multi-currency RMBS. The move represents a broadening of the issuer’s return to core funding markets which began in earnest in 2014 when it issued four covered bond benchmarks.

DNB Boligkreditt has stepped in to take advantage of demand in five year sterling floaters identified last week when JP Morgan issued a senior unsecured deal. On Monday, the Norwegian bank was set to become the first issuer this year to extend the sterling FRN covered bond curve to five years, with all other deals this year opting for three year tenor.

The public sector French covered bond issuer, Caisse Française de Financement Local, announced on Friday that by the second quarter 2015 it will be able to add export loan collateral guaranteed by the French credit agency, Coface, to its covered bond collateral pool.

Standard and Poor’s has completed the review of Spanish mortgage covered bonds following a change in its methodology, leading to a number of upgrades. Analysts said the agency’s rating process was complex and not easy to understand.

Three or four covered bond deals may emerge next week, but bankers believe the outlook for primary supply will shift to capital trades. To some extent, activity in this more prestigious sector stands to take the focus away from covered bonds and funding trades in general. Despite this, there are some hopes that borrowers from Europe’s periphery and outside the eurozone will issue covered bonds.

The OPEC meeting in June could result in higher oil prices, higher inflation expectations by year-end, and an end in sight to quantitative easing (QE), according to a presentation made at the LBBW covered bond conference in Mainz on Thursday. But in the meantime, investors have no option but to go down the credit curve or out on the maturity curve in search of yield, or exit covered bonds for higher yielding alternatives.

Vorarlberger Landes-Und Hypothekenbank issued a highly oversubscribed mortgage backed Pfandbrief on Wednesday, in a move that showed investors were not concerned about the issuer’s Swiss franc exposure that Moody’s had highlighted.