Covered Bonds

Covered bond bankers reported further buying in the short end of the curve on Wednesday but some questioned the sustainability of the correction and said sentiment could soon turn negative. Thursday’s European Central Bank meeting and Friday’s US Non-Farm Payroll numbers will set the tone for the primary market and issuance hopes for next week.

Denmark’s efforts to improve its covered bond law and reduce refinancing risk for its banks is a step in the right direction, Standard & Poor’s said on Wednesday. However, refinancing risk will continue to be a problem.

Credit Suisse’s head of covered bond origination has left the bank, following months of speculation over his position, EuroWeek Bank Finance understands.

The Irish covered bonds issued by Depfa Bank have been attracting strong interest, dealers reported on Monday, with further convergence to its Irish peers still likely. There has been speculation that the bank will be wound down, not sold to an unrated entity, after the deadline for its sale passed.

Cédulas Territoriales, Spanish covered bonds backed by public sector assets, have benefitted from extraordinary state sponsored liquidity support programmes and this is credit positive, said Moody’s on Tuesday.

Credit Suisse’s head of covered bond origination has left the bank, The Cover understands.

After days of softening, the tone in the secondary covered bond market improved on Tuesday, with bankers reporting an especially solid bid at the short end of the curve. But interest has also extended to the five year area, which had until recently been soft. The move has been fuelled by increased hopes of a European Central Bank rate cut on Thursday, as well as a defensive play against high and rising volatility.

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.