Covered Bonds

Royal Bank of Scotland this week issued its debut covered bond in its home currency, the second issuer to do so already this year. It chose to differentiate itself from Barclays, which sold a 10 year last week, with a longer, 12 year maturity and attracted a strong order book which enabled it to price in line with guidance. The deal has since performed well, in contrast to the Barclays deal.

Investors have devoured nearly €11bn of long dated covered bonds issued since the start of the year, but this week investors began to show fatigue towards deals with elongated maturities.

Senior unsecured bank debt began moving back on to the Swiss franc bond menu this week as a pair of fixed rate deals from Dutch duo ABN Amro and Rabobank rekindled yield-starved investors’ appetite.

Australia and New Zealand Banking Group became the first Australian issuer to launch a second syndicated benchmark covered bond on Monday. Looking to differentiate itself from dual five year euro debuts from Commonwealth Bank of Australia and National Australia Bank last week, the borrower tapped the crowded long end with a 10-1/2 year jumbo.

Investors this week warned the European FIG bond market not to get carried away with its impressive start to 2012, cautioning that many of the challenges that plagued the sector in the final months of last year remained.

Syndicate bankers had expected Thursday’s ECB meeting to curtail supply, but BPCE has courageously squeezed through the funding window with a competitively priced €850m 10-year tap.

The strong Italian and Spanish government debt auction results on Thursday have helped government bond yields tumble, which is good news for issuers. But with cheap financing from the ECB still on offer and covered bond spreads still wide to the government market, primary issuance prospects remain dim.

As a result of deal announcements and the new issue premium, secondary market turnover has been hit, with spreads moving on little volume. Curves have conspicuously steepened in France but DexMA remains out of line.

ABN Amro and Credit Suisse maintained primary market momentum on Wednesday, adding another €2.25bn of supply. ABN Amro paid above initial price thoughts to ensure smooth execution of its 10 year, while Credit Suisse was able to price its five year inside UBS’s offering last week — making it the tightest five year euro print of the year.

Four covered bond issuers collectively raised over €5bn of new funding on Tuesday across two currencies and three tenors. Total issuance this week exceeds €8bn equivalent and on Wednesday a further two are lining up with euro benchmarks. This suggests borrowers will have raised at least €25bn equivalent this year by the close of play on Wednesday.

RBS has issued the second sterling covered bond this year and its debut deal in the currency. It chose to differentiate itself from Barclays’ 10 year deal with a longer 12 year. In so doing, it attracted a strong order book enabling it to price in line with guidance and the deal has since performed well, in contrast to Barclays.