Covered Bonds

Covered bonds issuers in core and peripheral Europe will be aiming to finalise their 2014 funding needs in the next two weeks and others may be considering bringing forward their 2015 funding. As Irish and Belgian banks have been less active so far this year, there is a fair chance of supply from these regions. Covered bond research analysts have also recently reported on these markets.

The Bundesbank got its first chance to buy in the primary market on Monday when Landesbank Baden-Wuerttemberg priced a €250m four year Pfandbrief tap. The increase gave a fairly clear indication on the spread level at which public sector demand swamps the private sector and comes amid concern over a bond’s liquidity if the eurosystem’s ownership of a single bond hits its 70% maximum.

Standard & Poor’s said that forthcoming amendments to the Pfandbrief Act are credit positive. BaFin has the right to set overcollateralization levels for individual issues, but the rating agency said on Monday that this will not affect ratings. It does not believe the amendment will now make it easier for voluntary excess collateral to be removed from the cover pool.

The European Central Bank's covered bond purchase programme (CBPP3) turned relative value upside down this week, with a French deal pricing inside a similar Swedish offering, among a crop of four new issues.

The Financial Stability Board’s proposals outlining total loss absorbing capacity for financial institutions will make issuers prioritise unsecured over secured funding, boding poorly for the supply outlook in covered bond. They may also dampen bank lending, suggesting ultra-accommodative monetary policy will be needed to offset further economic retrenchment.

The European Central Bank's covered bond purchase programme (CBPP3) turned relative value upside down this week, with a French deal pricing inside a similar Swedish offering, among a crop of four new issues.

Covered bond spreads were steady on Thursday, but with buyers and sellers evenly balanced, traders had the impression that the Street was long of inventory. The European Central bank is expected to maintain a dovish line at its policy meeting on Thursday but will fall short of concrete measures, said bankers.

Primary covered bond issuance is expected to resume next week when Thursday’s European Central Bank meeting and Friday’s non-farm payroll data will be known. In the meantime, bankers bemoaned the distortive pricing impact of the ECB’s purchase programme, which is expected to lose momentum unless it takes a greater slice of the market.

BNP Paribas became the first issuer to print a French sub-Euribor ten year on Tuesday, hot on the heels of Monday’s sub-Euribor seven year from CFF. Europe’s second largest bank skipped initial price thoughts on the triple-A deal and had the syndication wrapped up by 10:30 CET.

On Tuesday Unione di Banche Italiane (UBI Banca) priced a €1bn ten year deal a full 10bp through where its outstanding ten year print from January was trading the previous day. The spread came sharply tighter through the execution process, helped by an early order from the ECB.

Compagnie de Financement Fonciere (CFF) priced this year’s first sub-Euribor seven year euro deal on Monday. At 5bp through mid-swaps, the issuer matched the price it obtained for its smaller, but extremely well received, five year print in September. Given the issuer has already completed its funding for 2014, Monday’s €1.5bn trade represents a significant contribution to the French issuer’s 2015 funding requirement.

Stadshypotek came to screens late on Monday morning to price the first Swedish covered bond after the opening of the European Central Bank’s third covered bond purchase programme. Although the central bank would not target Stadshypotek’s paper specifically as Sweden is not in the euro area, the programme has tightened spreads across the market.