Covered Bonds

A higher than expected take-up from a broader number of banks in the European Central Bank’s second long term refinancing operation has provided a lift to what is already a very well bid covered bond market.

Caisse Centrale Desjardins du Quebec priced its second ever covered bond at the tightest level for a Canadian issuer this year. The $1.5bn 144a/Reg S trade attracted $2.25bn orders from 45 accounts on Tuesday, after over a month without Canadian supply.

ANZ National attracted a €1.3bn book for a €250m tap of its October 2016 at 85bp over mid-swaps, which was inside the secondary level of its outstanding bonds. A few weeks ago the Bank of New Zealand had to postpone as euro deal because leads were unable to find enough demand. This sharp change in perception towards New Zealand covered bond risk pays testimony to a market where the dial can only be set to “on” or “off”.

The performance of cover pools has deteriorated, Crédit Agricole research has found after examining Moody’s, Standard & Poor’s and Fitch’s data. But this is not because of worsening credit risk but rather because of market risk.

ANZ National built a benchmark sized orderbook for a €250m tap of its inaugural euro covered bond on Tuesday and priced the deal inside its outstanding curve. With some buyers sidelined due to a lack of a legislative framework in New Zealand, the strong reception bodes well for an issuer intending to launch yearly euro trades.

Caisse de Refinancement de l’Habitat launched a €1.75bn 12 year benchmark on Monday. Though this was its second long dated deal this year and the sixth such French benchmark this year, there has been no long euro benchmark issuance since February 1 and as such, the market was desperately in need of this paper.

The covered bond market finished last week in a broadly positive shape, but the take up of Tuesday’s Long Term Refinancing Operation and the Greek Private Sector Initiative could play a pivotal role in determining sentiment for months to come.

The European covered bond market looks set to perform well as the forces of supply and demand exert their influence. The senior unsecured market has diminished scope for covered bond issuance, frustrating investors who are underweight. Despite that, there are high hopes that an Italian and Spanish deal will surface soon – and there is even talk of Portuguese deal later in the year.

The supply-starved covered bond market highlighted its increasing credit polarisation this week with both its tightest and widest deals of the year. 2012’s lowest rated covered issuer, Spain’s Bankia, got an inaugural public transaction away at 290bp over mid-swaps despite recent Cédulas downgrades, while rare issuer Deutsche Bank attracted more than €2bn of orders in under an hour for what bankers described as a "cheap Bund" at 22bp over.

The inaugural public benchmark from Spain’s Bankia boasted the highest spread and shortest tenor of any deal this year. It now plans to return with a longer dated trade, building on the strong demand it found for Wednesday’s deal.

Deutsche Bank pulled in more than €2bn of orders for the third German Pfandbrief of 2012. Leads priced the €500m no grow trade at 22bp on Wednesday, making it the tightest trade of the year so far, and the bond tightened further in the secondary market on Thursday.