Covered Bonds

Bank of Ireland Mortgage Bank opened books for 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 was the tightest spread for an Irish issuer since late 2010 when Ireland accepted a €85bn sovereign bail-out.

Austrian bonds offer the best relative value and the greatest protection from spread widening, secondary market traders told The Cover as they reported continued buying interest on Wednesday.

Covered bond encumbrance is longer term, less volatile, more transparent and much less correlated with a bank's health than other forms of asset encumbrance, RBS analysts said following recent publication of the European Banking Authority’s final draft for implementing technical standards on asset encumbrance reporting.

After a spate of seven year deals from Scandinavian banks, Norway’s DNB Boligkreditt was set to price a €1.5bn five year on Tuesday. This will sit well with investors’ year-end liquidity constraints, said bankers.

National Bank of Canada could well become the third Canadian borrower to issue a euro deal after mandating joint leads for a roadshow on Monday. It was approved to issue legally compliant Canadian covered bonds at the end of last week. At least two other core European banks could be tempted to launch deals this week, said bankers, but peripheral supply hopes are on the back burner.

The new Norwegian government’s pre-election pledge to ease mortgage lending standards would be credit negative, Moody’s said on Monday. Norwegian households are already highly indebted, house prices are overvalued and inflating the credit bubble further could result in a failure to repay high LTV mortgage loans under stressed market conditions, it said.

Hypo Noe Gruppe Bank AG is set to issue its first mortgage-backed deal early in 2014 after getting a triple-A rating from Moody’s. It will be collateralised mostly by promoted housing company loans and commercial loans of average quality.

House prices across Europe continue to fluctuate but they could stabilise soon, according to Standard & Poor’s. The picture varies widely, with Spanish and Italian prices set to fall again, but German prices likely to rise further, while Irish prices look to have stabilised.

SEB returned to the covered bond market on Monday to issue its second seven year euro benchmark of the year and the second from a Swedish bank in less than a week. Though SEB was unable to match the cheap funding in Stadshypotek’s recent deal, it was placed with more real money investors.

Norddeutsche Landesbank priced its second dollar covered bond benchmark this week, attracting a multiple oversubscription from a diversified range of high quality global investors. Though expensive, the funding showed the borrower’s commitment to building its US curve and establishing solid name recognition which will help it efficiently match-fund its dollar assets.

Two core covered bond issuers are looking to bring deals, but with European holidays on Friday, the funding exercises will be postponed until next week. In the secondary market, bankers reported clients extending duration in the core, switching from core to periphery, as well as adding to peripheral risk.

Banks continue to favour senior unsecured over covered bonds, but spreads will soon start to reflect the fundamentally weak claim of senior bondholders, RBS said on Wednesday, particularly for Spanish deals.