Covered Bonds

All eyes were on Barclays this week, as it brought the UK’s first additional tier one capital deal. The trade is expected to be priced on Wednesday afternoon and is another test for the nascent market, being only the fourth deal in the format. Elsewhere, the senior and covered bond markets continued their strong run as ravenous investors stampeded for paper in the run up to year end.

Cajas Rurales Unidas plans to sell a five year Cédulas Hipotecarias on Thursday, six months after making its covered bond debut. However, this is unlikely to herald a wave of Spanish covered bonds, said bankers. The issuer’s first deal had widened considerably following a Moody’s rating downgrade, but now trades well inside the reoffer.

Sparebank 1 Boligkreditt struggled to get investor traction on Tuesday morning for its €1bn long six year benchmark. The weak demand was in sharp contrast to last week’s €1.5bn five year bond from DNB Boligkreditt, with bankers away from the deal suggesting the long six year maturity may have been slightly too long for asset managers looking to shorten duration.

Swedish finance minister, Anders Borg’s call for the country’s banks to reduce their reliance on covered bonds to fund mortgages has not won support among bankers, who questioned the need to tinker with a funding mix that has served Swedish banks so well.

The most interesting take away from this week’s Bank of Ireland covered bond was the improved depth and quality of demand, according to Darach O’Leary, head of wholesale funding at Bank of Ireland.

All bar one of France’s public sector covered bond programmes face downgrades after Standard & Poor’s cut the Republic of France by one notch from AA+ to AA, Crédit Agricole research said on Friday. However, French mortgage backed covered bonds should avoid any downgrades. In any case dealers were certain the impact would be negligible.

Imminent changes to Denmark’s covered bond law that could extend maturities by 30 years will probably not hit spreads, Deutsche Bank said on Friday, as the trigger for the extension is too remote.

After a spate of seven year deals from Scandinavian banks, Norway’s DNB Boligkreditt priced a €1.5bn five year covered bond on Tuesday. The choice of tenor sat well with investors approaching year-end liquidity constraints.

Bank of Ireland Mortgage Bank launched and priced a 3.5 year covered bond on Wednesday after mandating leads a day earlier. The deal took advantage of a strong performance in Irish bonds in the wake of improving economic fundamentals, and achieved the tightest spread for an Irish issuer since late 2010 when Ireland accepted a €85bn sovereign bail-out.

In the covered bond primary market Münchener Hypothekenbank priced a €125m tap of its 1.125% October 2020 at deeply sub Euribor levels on Thursday, while in the secondary market the strong bid continued across the board, though some dealers had expected rates to sell off, before the European Central Bank announced its rate cut.

Spanish covered bonds issued by tier two banks could fare better than their Italian equivalents, even though Italian spreads have been less volatile than Spanish ones this year, RBS said on Thursday.

Repossessed Spanish properties are being sold at levels on average 71.6% lower than original valuations, Fitch said on Thursday. New mortgages are being originated with LTVs of 100%, affordability has not improved since 2008 and housing stock remains exceptionally high, its report said.