No FIG product is an island
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No FIG product is an island

Returning investors to the asset class are playing the spread between different varieties of bank bonds, giving issuers something to think about and swelling their order books

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The European primary covered bond market has been bolstered by hedge funds placing bids as they execute cross-asset strategies in recent weeks.

These international accounts — typically UK-based — have swelled the order books of several new covered bond issues and have arguably made the difference between whether a new transaction flies or merely floats.

In particular, fast money has been prominent in several primary deals that would traditionally be the preserve of domestic accounts — in Italy's Obbligazioni Bancarie Garantite (OBG) market, for example.

Among them, Crédit Agricole Italia has delivered the year’s standout covered bond so far. Last week, the bank priced a €500m 3.5% July 2033 green OBG and attracted 180 orders worth an astounding €4.5bn at a reoffer spread of 90bp over mid-swaps.

The spread was in line with where the French parent’s senior preferred bonds were trading made all the difference, resulting in an arbitrage opportunity for relative value investors.

Crédit Agricole Italia's deal was not a one-off either. Smaller Italian banks have sailed on Crédit Agricole Italia’s tailwind with similar success, driven by cross-asset buyers lured by spreads north of 70bp. For instance, this week Banco Popolare di Sondrio priced a no-grow €500m 3.25% July 2029 OBG at mid-swaps plus 77bp.

The fact that Sondrio — a bank not typically a constitutent of benchmark tracker funds — managed to pull in orders of €900m and price with no concession, possibly even through fair value, demonstrates the prevalence of cross-asset buyers in the OBG market. Without them, bankers say Sondrio’s outcome would have been markedly different.

Compare that with covered bond launches from German and Austrian issuers this year, for which reception was sometimes muted.

Different groups of investors buy each of the classes of bonds that Europe's banks issue, from covered bonds, through senior and down to additional tier one. That often makes each of those asset classes feel like its own silo.

Meanwhile, covered bonds have traditionally been a bank treasurer's rainy day product of choice. When the chips are down, you can at least get something done in the covered bond market to keep the cash coming through the door.

What this week shows us is that covered bonds can make for a decent sunny day product too, especially when investors pile in in the hope that they tighten against other FIG products.

That gives issuers that have to take a more expedient view of life in the capital markets a conundrum. Do they hold fire on covered issuance for when times are tough, or make the most of demand when it surfaces?

The verdict, at least as far as some of Italy's banks are concerned, is clear. Take it where you can get it.

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