Covered Bonds

After a week of severe fluctuations in all market segments, traders said Monday morning was the quietest day in weeks. Market participants are hoping for a modicum of stability to improve the chances of primary supply at the end of the month and several issuers from core jurisdictions are finalising roadshows in order to come to market, syndicate bankers said. But if new issue premiums are at the top end of expectations, they added, it will reshape the secondary curve — and this may deter some names from returning.

A theoretical 10% or 20% haircut on ECB exchanged Greek government bonds in the public sector cover pools of German banks would have a limited effect on nominal overcollaterlisation (OC). Spanish and Italian pool exposures are much larger and a factor that investors should take into consideration.

Following the US downgrade, the dollar market for triple-A rated bonds has been reduced from around $15,000bn to $136bn, closing the market to dedicated triple A buyers. Covered bonds should benefit, but with up to 40% likely to be downgraded within a year, buyers will need to be selective.

Issuers were this week undeterred by the growing uncertainties over the Swiss National Bank’s second shot at cooling the franc following a failed attempt on August 3. A number of financials tapped new-found money market demand as investors sought a replacement for treasury bills, which the SNB ceased to issue last week.

Covered bond analysts expressed fears this week about liquidity provision for Pfandbriefe cover pools taken over by administrators in the event of issuer insolvency. The debate was prompted by the German bank rescue fund, the FMSA, saying that it was prepared to rescue lenders if the debt crisis in the eurozone worsens.

French covered bonds widened this week following concerns that the sovereign could lose its triple-A rating. Meanwhile, traders reported buying in Spanish and Italian covered bonds as investors moved out of government paper, while core issuers faced up to paying wider new issue premiums.

French covered bonds have widened in the secondary market following concern that the sovereign could lose its triple-A rating. Meanwhile traders reported buying in Spanish and Italian covered bonds as investors move out of government paper.

The most recent amendments to the Pfandbrief Act provided greater clarification on the legal status of administrators of cover pools following issuer insolvency, but the potential for the ECB to deny repo funding remains, according to latest Deutsche Bank research.

Eurohypo released its first half results on Tuesday, reporting big public finance burdens caused by the Greek debt crisis, but a positive forecast on its commercial real estate business.

Ben Moulle will move from his job as head of SSA and covered bond trading at Nomura to join the SSA debt capital markets coverage team at the end of August.

Sovereign Italian and Spanish government bonds resumed tightening on Tuesday morning, outperforming covered bonds. However, covered bonds have held in on a mid-swaps basis. With the sovereign purchase programme underway, traders said investors prefer to hold short dated government paper, rather than switch into covered bonds. Wide bid/ask spreads have meant that volumes have been concentrated in the sovereign space, with very little transacted in covered.

Government bond yields for Spain and Italy tightened on Monday morning after the European Central Bank’s announcement that it will buy up the countries’ sovereign debt, but moves in covered bonds were more conservative. Bid offer spreads for most peripheral paper remain near the record levels reached last week, said traders.