Covered Bonds

Market sentiment has begun to weaken while the Greek sovereign’s future remains uncertain. The mood has hurt the secondary performance of recent trades across several asset classes, including Barclays’ €2bn five year covered bond which was launched on Wednesday.

Barclays Capital shrugged off sovereign rating action and the possibility of a Greek default to launch a well oversubscribed euro benchmark on Wednesday. The covered bond market remains technically well supported despite negative headlines, and syndicate bankers still expect issuance to move down the credit curve as blackout periods end.

After Moody’s downgraded several European countries and put others on negative ratings outlook, covered bond analysts have assessed the effect on the issuers’ covered bond programmes. Though the most marked impact is in peripheral Europe, many programmes are likely to hold their top rating — provided that the Timely Payment Indicator is not lowered. In any case, the market remains technically squeezed, and so far there has been no effect on spreads.

Covered bond issuance hopes for the forthcoming week have dimmed as the final reckoning on Greece draws closer.

Tightening spreads and bulging order books since January have failed to lure German banks into issuance. The rate at which the banks are deleveraging and retreating from foreign markets has made financing through wholesale markets completely redundant. But they will still need to put their new balance sheets to work, and Fitch has questioned whether the domestic market is large enough to absorb this lending without mispricing.

Although the covered bond secondary market remains very well bid, the primary market is taking a breather as concerns over the Greek situation and Moody’s sovereign rating action weigh on sentiment. In that context, Catalunya Banc’s tender result, though modest, was definitely worthwhile for the issuer.

Despite a pause in primary supply, the secondary market remains very well bid and, driven by a scarcity of paper, offers are difficult to find. Investors have sought to take some profit at the very short end and move out along the curve in search of yield but turnover is limited.

Spain’s Bankinter and Bankia are expected to launch short dated trades later this week, after the primary market paused for breath on Monday. Cash rich investors with an appetite for risk should ensure they get a strong reception, but negative rating action could yet cause them to hold off.

Compagnie de Financement Foncier would have had to pay a 20bp new issue premium a few weeks ago but, in its most recent deal, it paid no premium whatsoever. Moreover, the deal attracted the largest book of any French benchmark, which has ensured a strong performance. Though in hindsight it could have probably priced tighter, it would not have earned much needed kudos for taking the last cent off the table.

The bullish market was again in evidence at the end of last week after CFF issued a €2bn August 2015 at mid-swaps plus 95bp on Friday. Though this was flat to its curve, the borrower attracted a €7bn book from about 270 investors.