Covered Bonds

The covered bond market was trading more softly on Friday with equity markets lower and Bunds firmer. Though recent issuance has traded down, bankers reckon a rapidly shrinking funding window for 2014 means deals will still come next week.

With covered bond primary issuance unlikely to grow next year and the ECB expected to prevaricate over the merits of full blown sovereign quantitative easing, covered bonds will be its main vehicle for expanding the balance sheet. This week the balance sheet shrank, so it had better step up buying if it wants to hit the requisite €1tr expansion needed to reach March 2012’s levels. That will surely mean its ownership of covered bonds must rise.

The European Central Bank's covered bond purchase programme is lowering funding costs but its price distorting effect is slowly but surely crowding out private demand. Recent deals from BNP Paribas and BPCE attracted less than 50 investors, when usually they would have attracted closer to 100. Central bank participation in primary books has more than doubled to 40% and, as bonds tighten further in the secondary market, private investors will be encouraged to take profit and sell to the only buyer in the Street.

The covered bond market has started to lose some of the energy and excitement that followed the announcement of the European Central Bank’s purchase programme. This week, BPCE issued a finely tuned deal that was sized precisely to demand.

Australia and New Zealand Bank on Wednesday issued the tightest ever deal issued by an Australian bank in euros. The five year bond nevertheless offered a decent pick-up to where covered bonds issued by eurozone banks have been priced, and to the issuer’s curve.

Santander returned to covered bonds this week with its first deal in nearly two years which, by virtue of its sheer size and duration, was remarkable. The two tranche deal included a 20 year piece that has not been seen in covered bonds for seven years. This was targeted to asset managers and insurers in the private sector — in sharp contrast to many other deals such as a €250m four year tap from LBBW that the Bundesbank mostly bought. The trades rammed home the distortion the European Central Bank's purchase programme (CBPP3) is causing the covered bond market which market makers said had potential to cause considerable mark to market pain.

The covered bond market has started to lose some of the energy and excitement that followed the announcement of the European Central Bank’s purchase programme. As the bid for Santander’s Cédulas widened the day after launch on Thursday, BPCE issued a finely tuned deal that was sized closely to demand.

A veteran of funding and hybrid capital at Lloyds Banking Group has switched to the investment side, taking the reins of the group's portfolio of assets to ensure it is in compliance with the liquidity coverage ratio.

Santander returned to the covered bond market on Wednesday after a 21 month absence with a dual tranche offering that included a 20 year tranche, a duration that has not been seen from a Spanish issuer for at least five years, and which responds to unsated demand from insurance firms.

BPCE SFH has mandated leads for a no grow 10 year.

Australia and New Zealand Bank returned to the covered bond market on Wednesday to issue the tightest ever deal issued by an Australian bank in euros. The five year transaction nevertheless offered a decent pick-up to where covered bonds issued by eurozone banks have been priced and the issuer’s curve.

Australia and New Zealand Bank mandated joint leads for its second euro covered bond of the year and the fifth Australian benchmark in euros this year. The deal is expected to be launched on Wednesday, and should offer a premium relative to its own curve and a much larger premium to deals from eurozone borrowers.