Christmas is coming but don’t expect a miracle
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Covered Bonds

Christmas is coming but don’t expect a miracle

It will be success enough for covered bond issuers to get their deals away. They don't need to shoot the lights out

Three Wise Men. Image shot 1950. Exact date unknown.

Settling for a generous new issue premium with a modest oversubscription could prove a winning strategy as covered bond funding will only get more expensive.

Covered bond issuance in September and October was well below normal levels, and though some of that latent supply was pushed into this week, a lot has been deferred into next year.

It's a credible tactic. Conventional thinking dictates that investors will have fresh money to put to work and plenty of redemption flows. But it won't work for every borrower.

The ECB is going to ramp up quantitative tapering and there will be plenty of competing supply from sovereign, supranational and agency borrowers. Widening SSA spreads spell trouble for those of covered bonds.

At the same time, in 2024 eurozone banks must return €450bn borrowed under the European Central Bank’s Targeted Longer Term Refinancing Operations. And unlike January this year, the ECB will not be there to support covered bonds.

Seeing trouble ahead, issuers will have every incentive to front-load funding, meaning a more frenetic start to the year than usual. Covered bonds have widened 10bp-30bp on an index basis this year and could easily do the same early next year.

Against this awful backdrop, paying a high single digit concession to get an oversubscribed deal away in the remaining three weeks available for issuance this year looks a better bet than hoping things will get better. They won’t.