Covered Bonds

Spread tightening has stalled after the first quarter rally, according to DZ analysts, who urged investors to reposition themselves in preparation for spread widening. But with many investors still on holiday, the secondary market has become easier to move with smaller tickets, and traders said it was too early to draw conclusions from an increase in selling.

This year will see an important step taken in the European implementation of Basel III’s Liquidity Coverage Ratio. For covered bond bankers, the thorny issue of what constitutes a liquid product is top of the agenda and they argue that a purely quantitative approach is the wrong way to go about it.

The Pierre, New York

The passing of Australian covered bond legislation gave the covered bond market a timely fillip. Without the arrival of Australian issuers, 2012’s year to date level of supply would be even further behind last year’s. As such, subdued eurozone issuance has quickly turned Australian covered bonds into a pillar of the market – and not just a convenient safe haven trade.

Sovereign markets have started to stabilise but covered bonds have lagged this move and remain under pressure in the secondary market. The focus has been on Spain but dealers also reported weakness in French covered bonds. In the primary market, issuance hopes remain dim, though bankers think there may be room for a Swedish or Finnish deal.

The ECB’s Long term Refinancing Operations have sent cash-rich investors rushing back to the primary and secondary markets. But while some jurisdictions have re-opened, others remain closed. The €1tr of liquidity injections have improved primary issuance but could the epic secondary rally be headed for disaster?

Sentiment continued to look poor in European sovereign and covered bond markets on Tuesday following further negative headlines. But technically the market looks well placed, with high redemptions and coupon payments boding well for prospective issuance in the latter half of April.

German ship financing banks have been roadshowing in the US to boost their Schiffspfandbriefe investor base but the industry is unlikely to attract a new investor base soon, said market participants.

Covered bonds are moving towards a system of labelling, designed to act as a kitemark of quality. But investors should remember: there is more to credit analysis than ticking boxes. Weak deals can pass through labelling systems, while great deals can get excluded.

After four years running HSBC’s global push into the covered bond market, Andrew Porter is moving to new pastures. Following the Easter break, he will relinquish his position as global head of covered bonds, based in London, to head the bank’s DCM operations in Toronto.

Covered bond issuance in the first quarter of 2012 was the second busiest ever for the first quarter. Though euro-denominated issuance fell by 45%, this was offset by a large rise in volumes of other currencies such as sterling, dollars and Australian dollars.

The assets that public sector Pfandbrief issuers select as collateral have become more important, according to Moody’s. As concern around peripheral eurozone sovereigns mounts once again, the rating agency reported that some programmes have increased their exposure to peripheral countries and to assets in sub-investment-grade countries.