Covered Bonds

Peripheral covered bonds tightened against government debt on Monday, undoing sovereign outperformance following last Thursday’s rally. Bid offer spreads continued to widen across the board as participants remain cautious ahead of purchase programme details.

Activity has once again shifted into dollars, with European investors paralysed by a lack of detail on the upcoming ECB covered bond purchase programme and a resolution of the sovereign debt crisis. Meanwhile Canadian banks issue dollar deals with ease, and Australia’s big four could be swayed into taking the same route for their respective debuts, said syndicate officials.

Since its inception in 2008, Canada’s covered bond market has grown steadily to become the cornerstone of US dollar supply. The next step will be the enactment of a covered bond law which will allow Canadian banks to reach investors across the globe. Between regulation and legislation, however, Canadian covered bond issuers face stringent limitations on the product’s use.

Bank Austria has followed BPCE successfully raising €500m with a five year public sector backed covered bond that priced at the tight end of guidance on the back of an exceptionally granular book. The decision to price ahead of next week’s announcement on the purchase programme caught some bankers by surprise. But with significant central bank demand in the book, it is doubtful whether there would have been much to gain from postponing.

The UK’s Co-Operative Bank will begin a European roadshow next week, laying the ground for a debut issue out of its €3bn covered bond programme.

The euphoric reception that greeted EU leaders’ statements after their all-night effort to kill off eurozone sovereign crisis contagion fears will quickly regress into fresh worries over detail, bankers warned on Thursday night.

With the official unveiling of the European Central Bank’s second covered bond purchase plan less then a week away — and the ECB’s new chief Mario Draghi taking over from Jean-Claude Trichet on November 1 — market participants have told EuroWeek they expect the central bank to concentrate its €40bn of fire power on the weaker and more illiquid markets including France, Spain, Italy, Ireland and Portugal.

France’s BPCE carried out a heavily oversubscribed tap of its 10 year covered bond on Thursday morning, ending 10 days without any primary supply.

Books for BPCE’s 10-year reopening are “substantially in excess” of the minimum €200m that was envisaged just half an hour ago, according to a banker working on the deal. The fact that the books have only been open for such a short time suggests that there is a strong groundswell of demand that other covered bond issuers will want to take advantage of.

Books for BPCE’s 10-year reopening are “substantially in excess” of the minimum €200m that was envisaged just half an hour ago, according to a banker working on the deal.

Market indices rallied on Thursday, following the EU’s unveiling of its Grand Plan to remedy the eurozone’s woes. BPCE was quick to capitalise on the upturn, securing nearly four times oversubscription for a minimum €200m tap of its 10 year. Bank Austria also moved swiftly on the positive mood and is taking IOIs for possible pricing this afternoon or Friday. Bank of Montreal showed the strength of US demand on Wednesday, when it attracted $3.75bn of demand for its $2bn three year deal. But the floodgates are unlikely to open fully ahead of November 3 when the ECB will announce details of its purchase programme.

Secondary market activity has picked up on Wednesday, with decent buying reported in Nordic, Italian and, to a lesser extent, French names. There is a growing belief that the new ECB buying programme may well benefit the peripheral nations more than the first programme did. An announcement on the EFSF is also expected on Wednesday night, even though it is likely to be short on specifics.