Covered Bonds

European credit markets had a slightly better day on Wednesday, with Bund yields rising 10bp to 1.83%, peripheral bond markets tightening versus Germany and equities rallying. The modest respite provided a window for Credit Agricole to jump through with an opportunistic €200m tap of its January 2021s. At mid-swaps +110bp, pricing was in line with its outstanding deal and was driven by reverse enquiry and short covering.

New York City

Moody’s has downgraded covered bond ratings of six Italian banks, and has placed the mortgage covered bonds of four other banks on review for downgrade. The action follows the rating agency’s three notch downgrade of the sovereign and ensuing downgrades of issuer ratings.

The prospect of another ECB covered bond purchase programme (CBPP) has kept issuers and investors in risk off mode all week, but Nationwide bucked this trend on Thursday and took the market by surprise with a €1.5bn five year deal. The offering is the first €1bn-plus, euro covered bond in more than a month and it stands in stark contrast to last week’s sub-jumbo deals — all on a day that few picked out as a window.

Traders reported muted flows in the secondary market on Wednesday ahead of Thursday’s ECB meeting, amid intense speculation that another round of covered bond purchasing could be announced. Italian bonds have reacted remarkably stoically to the republic’s triple notch downgrade — although this might be due to the absence of bids for second tier institutions.

Moody’s three notch downgrade of Italian sovereign debt, from Aa2 to A2 with a negative outlook, will heap more pressure on ratings of Italian banks, which could have a knock-on effect on covered bond ratings, said research analysts.

With the covered bond market waiting for constructive news out of Thursday’s ECB meeting, primary activity on Wednesday was limited to a €200m tap of Crédit Agricole’s 2021s. Syndicates said the tap showed investors were not totally sidelined, but the market — like other asset classes — was in desperate need of a message that would restore confidence and allow new issuance to be absorbed in the secondary market without provoking a sell-off in outstanding bonds.

Hopes of primary market supply evaporated on Tuesday morning as global equity markets dropped and European iTraxx indices and peripheral CDS widened further. In the secondary market activity focused on the embattled Dexia Municipal Agency, with its spreads widening 20bp across the curve. Dexia’s triple-A covered bond rating is under threat, though talk of its parent bank being placed into joint venture with French entities Banque Postale and Caisse des Dépôts et Consignations could bode well for its covered bonds.

The covered bond, once an exclusive triple-A rated product bought by rates investors, is quickly establishing itself as a credit product. Investors — and issuers — have no choice but to get used to the new reality of a double-A covered bond market. Bill Thornhill reports.

New Zealand’s ASB Bank has issued a prospectus for a €7bn covered bond programme, following its compatriots Bank of New Zealand and Westpac New Zealand into the covered market.

With Germany on holiday on Monday, activity in the covered bond market was largely focussed on the secondary – where developments on DexMA took centre stage. Moody’s put Dexia group on downgrade review and covered bond analysts say that, with just a one notch senior downgrade, DexMA’s OF could lose their triple A rating.