Covered Bonds

Credit markets are on the back foot but bankers say the outlook for covered bonds is still relatively benign. However, investors are becoming more price sensitive and issuers need to take into account the changed market environment if a mishap is to be avoided, bankers said.

This week’s spike in volatility was a warning shot. It was unreasonable to expect the grab for fixed income yield to last for ever — and the world needed reminding that markets don’t just go up. After nearly eight months of one-way traffic it was hardly surprising that a false sense of security had developed.

The covered bond pipeline is building with several transactions rumoured, a New Zealand bank on the road and a German issuer on Friday mandating banks for a trade next week.

Crédit Agricole SCF returned to the covered bond market for the second time this year with its second ever public sector backed deal. And for the first time in the history of the French covered bond market, the deal priced through OATs.

National Australia Bank returned to the covered bond market on Wednesday to issue the longest dated euro deal from an Australian issuer. By virtue of its 12 year duration, the €750m transaction offered a generous spread compared to existing Australian deals and was aptly targeted at yield hungry insurance funds.

Caja Rural Navarra this week priced an inaugural €500m five year covered bond at the tight end of guidance from a comfortably oversubscribed book. But concerns over absolute yield levels and a less than stellar performance of a recent Cajas Rurales Unidas issue could spook investors, bankers away from the deal warned.

Belfius Bank on Tuesday mandated and launched a seven year mortgage backed covered bond with pricing closer to Belgian peer KBC Bank than any of its previous funding.

Bank of Ireland this week brought the first senior unsecured bond from an Irish bank since before the financial crisis, underlining the country’s success in remarketing itself to investors after the EU and IMF bailout in 2010.

Equity and bond market volatility continues to weigh against sentiment and net flows in the covered bond market have been biased to the offered side this week. But traders and investors are sanguine on the outlook for covered bonds, despite market concerns over a possible asset bubble, an end to the Federal Reserve’s quantitative easing and Japanese bond market volatility.

National Australia Bank returned to the covered bond market on Wednesday to issue the longest dated euro covered bond deal from an Australian issuer. The €750m 12 year is expected to appeal to yield hungry insurance funds with its generous spread pick up to existing long dated Australian deals.

Caja Rural Navarra looks set to price its inaugural €500m five year covered bond at the tight end of guidance on an oversubscribed book. But concerns over absolute yield levels and the less than stellar performance of Cajas Rurales Unidas’s recent deal could spook investors, despite the attractive spread, said bankers.

Crédit Agricole SCF returned to the covered bond market for the second time this year with its second ever public sector backed deal. The €1bn 10 year transaction priced through the OAT, which was the first time in the history of the French covered bond market.