Covered Bonds

Covered bonds are vital for the long term financing of the European economy and should be defined as extremely highly liquid assets eligible for the top level of Basel III’s Liquidity Coverage Ratio, the European Covered Bond Council argued on Tuesday.

Moody’s has backed a move to define the status of France’s specialist mortgage lenders and covered bond issuers. However, their less stringent liquidity requirements and inability to operate on an EU-wide basis could be credit negative for their foreign operations.

Peripheral European covered bond programmes are improving in credit quality, with Spain leading the way, according to Moody’s latest market overview. The positive news should bolster confidence and help to underpin the year’s rally in peripheral covered bond markets.

The covered bond market showed its mettle this week as two peripheral issuers spurned emerging market volatility to price large, long dated benchmarks which drew exceptional demand.

January 2014 has had is similar amount of covered bond supply as this time last year, but redemptions and coupon payments have almost halved compared with 2013. The most deals have come from France and Italy, both up sharply from last year, while the largest decline in issuance has been in Spain, and to a lesser extent Germany and Norway.

Core covered bond deals sized at €1.5bn have had mixed success so far this year. Tuesday’s five year from Crédit Mutuel CIC SFH was only moderately oversubscribed but was well placed, trading stably at end of the week.

The covered bond market showed its mettle this week as two peripheral issuers spurned emerging market volatility to price large, long dated benchmarks which drew exceptional demand.

Core covered bond deals sized at €1.5bn have had mixed success so far this year. Tuesday’s five year from Crédit Mutuel CIC SFH was only moderately oversubscribed but was well placed, trading stably at end of the week.

WL Bank priced the shortest fixed rate euro denominated covered bond of the year on Tuesday, at the tightest spread of any transaction since November 2012. Bankers off the deal questioned why any investor would pay such a tight price, while those on the deal said the cheap funding reflected the issuer’s high quality appeal.

The covered bonds of French issuers that are backed by relatively weaker collateral are trading at the tightest spreads, while French deals backed by higher quality collateral are trading at wider spreads, according to DZ Bank covered bond research.

There was strong secondary market interest in the long end of the peripheral market, and especially Italian bonds, on Thursday. In contrast, core covered bonds came under greater selling pressure, partly due to switching interest from Wednesday’s deals. The flows were counter-intuitive to the wider macro backdrop, where the flight to safety bid has resumed.

The covered bond market is taking the limelight this week, with five borrowers from Germany, France and Italy issuing deals at vastly different funding levels, and with very different outcomes. Senior was slower to start, after last week’s sell-off, and while capital deals are promised, they have yet to materialise.