Covered Bonds

The outlook for primary market is set to pick up with UK, German and New Zealand deals in the offing. After the Yorkshire Building Society announced its intention to go on the road and bring its first euro deal in five years, Westpac New Zealand has said it will go on the road next week to market the first covered bond since the country enacted a legal framework.

The improving quality of the mortgages which back Australian covered bonds means they require less collateral than in the past to sustain a top rating, said Moody’s in a report on Wednesday. The assessment comes a few days after Fitch’s quarterly overview, which showed a sustained increase in investment mortgage lending. — But this higher risk lending is correlated to Australian house price growth which, since the year 2000, has exceeded both Spanish and Irish house price growth, according to data from The Economist.

Royal Bank of Canada could be ready to return to the euro covered bond market for the first time this year after emerging from blackout last week. It is one of only two Canadian borrowers that has not issued a euro benchmark this year, while Danske Bank’s research team believes Canadian issuance is set to pick up.

Bank of Scotland and Lloyds Bank announced a tender for three short-dated covered bond deals denominated in euros and sterling on Tuesday. This will be the borrower’s second liability management exercise in covered bonds undertaken within the past year.

Bankers reported better buying at the long end in peripheral covered bonds on Friday, while core markets were technically well supported. Despite improved signs of stability, the Street is long of inventory in the periphery and less able to absorb selling flows if they re-emerge, particularly at the long end.

Spread widening in periphery covered bonds are a correction rather than a trend reversal, said Commerzbank’s research team this week.

The covered bond market is in danger of losing a swathe of real money investors who have been put off by low returns and declining issuance. But a rich new stream of demand from bank investors looking to fill their liquidity buffers could fill the vacuum in time. However, these buyers should be more interested in looking at the nascent floating rate format and not the fixed rate market that until now has prevailed.

National Australia Bank surprised the covered bond market on Wednesday mandating Barclays, Credit Suisse, Royal Bank of Scotland and itself for a benchmark euro seven year transaction, the fifth in that tenor this month. The announcement came against a volatile credit backdrop as peripheral sovereign bonds widened along with some unsecured bonds.

Kutxabank opened books for a €1bn seven year Cédulas Hipotecarias on Monday, Spain’s fourth covered bond of this year. The issuer priced the deal through its curve even as Spanish government bonds underperformed.

After a long string of covered bond syndication success stories this year, demand showed signs of wavering on Tuesday when Landesbank Hessen-Thueringen (Helaba) issued a tightly priced two tranche Pfandbrief.

Sovereign bond market volatility continued to buffet markets on Thursday and, after the slew of FIG issuance in the last week, there was a degree of supply indigestion. But covered bond bankers did not think there was much to be read into the lacklustre execution of this week’s German and Australian deals. The two issues were solid trades, but for idiosyncratic reasons lacked the sparkle of earlier deals.

The prospective amendment to the German Pfandbrief Act to give the German regulator authority over minimum overcollateralization (OC) may prove a credit positive, said Fitch on Tuesday. But the proposals are too thin on detail for any concrete rating action on programmes to be taken.