The covered bond market is going through a purple patch. Deals are flying off the shelves as investors lap up the product. And thanks to the demand, issuers are reining in concessions to low levels — sometimes even dipping through fair value.
However, despite the robust and rampant interest in the product in recent weeks, covered bond spreads are still close to their highs.
Take DZ Hyp: this week, the German lender priced a 10 year deal at 35bp over mid-swaps. Just nine months earlier it sealed a near identical trade at a level19bp lower.
Of course, it’s tempting to dive into the covered bond market feeding frenzy, especially when you look at the books and spread moves available.
But instead, issuers should park their covered bond programmes for a bit and print senior bonds, even if the demand pales in comparison.
Last Wednesday, Novo Banco smashed into the covered bond market for the first time with a €500m three year at 145bp over mid-swaps, backed up by a book of close to €5bn.
A debut senior preferred sale followed exactly seven days later, and although this €500m four year non-call three print attracted a third of the demand, it came only 85bp wider — despite being rated 10 notches lower.
Senior paper is tight, especially when compared to its far richer secured sibling. Treasury teams would be well placed to lock in these tight levels now — and avoid encumbering their asset pools at such wide spreads.