Covered Bonds

The Bank of England said on Tuesday that it would include covered bonds into its stress test of UK banks, in contrast the European Banking Authority, which did not specifically mention covered bonds.

The Bank of Montreal (BMO) became the sixth Canadian bank to issue legislative covered bonds when it opened books for its first legislative deal on Tuesday. The transaction was priced at the tight end of the range of Canadian deals and encountered some price sensitivity but was still comfortably oversubscribed.

Compagnie de Financement Foncier (CFF) came to market with its second Obligation Foncière of the year on Tuesday, matching the March deal’s €1bn size but this time opting for a 10 year, rather than five year, tenor.

The market sprang back to life on Monday with Bank of Montreal mandating Barclays, BMO Capital Markets, Commerzbank and HSBC to lead its inaugural covered bond transaction, which is a euro-denominated deal targeted for launch and pricing on Tuesday. The tenor is yet to be determined.

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Core trading volume was light on Friday morning, but negative momentum in Cédulas resurfaced. The bonds continue to suffer broadly on the back of a downgrade of nine deals to below investment grade by Standard & Poor’s on April 15.

Banking funding rules should have diversity and stability in mind, and steer clear of favouring one funding format over another. But a Basel consultation document on the Net Stable Funding Ratio published this month, promotes the exact opposite, and will make bank funding less stable.

Banking funding rules should have diversity and stability in mind, and steer clear of favouring one funding format over another. But a Basel consultation document on the Net Stable Funding Ratio published this month promotes the exact opposite, and will make bank funding less stable.

The Swedish Bankers Association reckons the Net Stable Funding Ratio (NSFR) would cause banks to rely less on covered bond funding and more on alternative sources that are not as stable.

The recent correction in multi-cédulas following Standard & Poor’s rating downgrades last week has almost run its course. Though there is a slight risk that month-end portfolio re-balancing will provoke further near-term losses, the longer range picture is fundamentally and technically well supported.

Bank of Montreal’s (BMO's) covered bond programme was recently signed off by the Canadian Mortgage Housing Corporation (CMHC), giving rise to speculation that it could return to the covered bond market after Easter with a newly set-up programme and a legally compliant covered bond deal. A still-favourable cross-currency swap suggests it could become the fourth Canadian bank to issue in euros this year.

Bank demand for covered bonds could be restricted as a result of new proposals on large exposures set out by the Basel Committee on Banking Supervision (BCBS) which are set to come into effect in January 2019.