Access to 10 year covered bonds — a market long hailed for its accessibility to long-term funding — has been sporadic all year.
With only 15 deals launched in that tenor, the most recent being a thinly subscribed offering from LBBW 10 weeks ago, the record in 2023 is especially abysmal.
There had been hope that pent-up demand built over the summer would give issuers the opportunity to try their luck after the holidays. But with 10 year Bund yields soaring then collapsing by 30bp in August, investors have been spooked.
Buyers need to see some rates stability before venturing into the long end, where mark-to-market risks are much more painful than in the traditionally seductive short end.
And issuers are not yet inclined to make up for the curve inversion between two and 10 year euro swap yields, which was minus 54bp on Thursday — close to when LBBW did its deal.
Crystal ball gazing at conflicting macro-economic signs is proving a frustratingly tiresome game. Headline inflation is on the right trajectory, but labour markets and wages are not. Rates may have risen at their steepest pace in a decade, but debtors had the sense to lock in long-term borrowing when they were at all-time lows.
But higher rates will eventually take their toll. The Dutch economy fell into a technical recession this week and, with the Eurozone Purchasing Managers Index falling to a 33 month low, employment creation and wages should slow, putting fixed income bears into hibernation.
The ability to predict when the market will pivot may still be hampered by opposing signals, but these will coalesce one day and demand for duration will return. The difficult part is predicting when that will happen.