THE EUROPEAN Covered Bond Council’s Eight-to-Eight market-makers’ and issuers’ committee on Monday lunchtime restarted interdealer market-making obligations after the temporary suspension, but with minimum ticket sizes cut from Eu15m to Eu5m, and bid/offer spreads set at three times normal.
"The covered bond market is one of the most robust and liquid triple-A markets in the world and following more normalised trading activity in the last 2.5 days, the committee recognises the importance of returning to the inter-bank market making system that is a key feature of the covered bond market," said the ECBC.
"However, acknowledging the reduced liquidity that currently exists across the fixed income markets, from government bonds to swaps and agencies, the committee reached the recommendation that market makers be obliged to make a minimum of Eu5m by Eu5m markets to one another on three times the normal market making bid/offer spreads until market making closes as usual on December 14."
Mixed reaction
The decision received a mixed reaction; some market participants saying that it was necessary and others calling it meaningless. However, the covered bond market this week was unquestionably more stable than before the suspension, even if the primary market is still expected to remain closed until the new year.
Patrick Amat, chairman of the ECBC and chairman of CIF Euromortgage, supported Monday’s move as the best course of action.
"The decision last Wednesday to suspend interdealer market-making obligations was taken in very exceptional circumstances," he said. "Now that we have restarted them we have not seen any big movements in the market.
"We are pleased to see that the market is calmer, as we had anticipated, because our objective was to give it the time to stabilise."
He also stressed that the suspension had not applied to dealing with investors, and the response from the buy-side was encouraging. One investor said that he was reasonably satisfied with secondary market liquidity given the circumstances, even during the suspension.
"We investors can still get small trades of Eu5m-Eu10m done," he said. "Of course not in the size before and in names like Northern Rock or WaMu, but it’s not so bad."
Investors sympathised with the original decision to suspend interdealer market-making. "It is sensible given that the market-making on some government bonds is collapsing," said one. "You can’t expect the covered bond market to function when the rest of the world has fallen apart."
Among bankers, some argued that the new Eu5m minimum ticket size compared with the previous Eu15m at three times standard bid/offer spreads rendered the new obligations meaningless. But many said that some kind of restarting of the system had to be done.
"We’ve gotten a couple of calls, so it is not necessarily a bad thing," said one banker. "Had we not restarted, it would have called into question the whole commitment of the market.
"But it has to get back to Eu15m — and at least only two times — in the new year or we can forget about the whole concept of market-making."
A recovery in some of the sectors worst hit before the suspension followed the resumption of interdealer market-making.
"On the back of improved liquidity by the resumption of interbank market making at the beginning of the week and good figures with strong increase in deposits provided by Nationwide last week, we saw client buying in five year UK covered bonds," said Bernd Volk, Deutsche Bank’s covered bond strategist. "We also saw buying of 15 year and 20 year cédulas at levels of mid-swaps plus 30bp in good size."
The spectre of the market being split into "core" and "non-core" jurisdictions with different market-making conventions was raised by one covered bond investor. Others in the market believe such a move is a real possibility.
"Talk of trying to find a pan-European solution is not the way out," he said. "If the UK and French structured issuers don’t solve the problems they have, then how long does it make sense for the Germans to suffer?"
