Covered Bonds

The lower than expected take up of the Targeted Long Term Refinancing Operation is positive for covered bond supply. It should also lead to an expansion in covered bond demand, as the rising probability of a sovereign quantitative easing (QE) programme and resulting sovereign rally improves relative value, especially for peripheral covered bonds. However, political uncertainty in Greece is causing peripheral spread widening.

The pace of covered bond purchases is likely to slacken next year due to natural market forces, but also because the European Central Bank’s focus will turn to sovereign bond purchases, said Commerzbank analysts in their 2015 outlook published on Wednesday. Despite estimating a €15bn annual decline in supply to €100bn, new regulations which require banks to focus on capital rather than funding will not be overly negative the analysts said in a report published on Wednesday.

European covered bonds are expected to benefit from strong and increasing regulatory support and an improving sovereign outlook, said Moody’s in its covered bond outlook for 2015. However the positive credit view takes no account of market value which remains negative.

The European Central Bank increased its purchases of covered bonds in the secondary market last week as primary activity remained subdued, but the increase has only had a marginal impact on spreads.

Mediobanca and UniCredit could see their covered bonds drop to A- after Standard & Poor’s downgraded the Italian government by one notch to BBB-.

The 2nd Annual AFME/ vdp Covered Bonds Market conference

Covered bond investors continue to be concerned about the European Central Bank’s third covered bond purchase programme, as the intervention appears to be pushing private money out of the market. Central bank allocations in recent deals have been up to 60%, and at least one cornerstone investor is gradually exiting the market.

Covered bond harmonisation must be ambitious rather than lowest common denominator, or there is little point in the project, according to a presentation at the Association for Financial Markets in Europe / Verband deutscher Pfandbriefbanken covered bond conference in Berlin.

A covered bond from Cassa di Risparmio di Parma e Piacenza (Cariparma) on Wednesday marked a shift in the European Central Bank’s pursuit of its purchasing programme of covered bonds. With bankers fretting that the eurosystem was killing the market, the official money showed up late and in smaller size meaning private investors had more of a look in than they have been used to, writes Bill Thornhill.

This week the ECB scaled back buying in the primary covered bond market and gave the private sector a chance to set the price.

This week the ECB scaled back buying in the primary covered bond market and gave the private sector a chance to set the price.

Cassa di Risparmio di Parma e Piacenza (Cariparma) issued a €1bn seven year covered bond this week that built on private sector demand, rather than relying on the European Central Bank. The deal followed a handful of lacklustre primary covered bonds in which more than half was placed with the ECB, and revitalises a market which had become deeply despondent about the effects of central bank action.