To say the wheels are coming off the euro covered bond market might be to veer into hyperbole. However, after months of bumper books and tightly priced deals, fatigue is creeping into the primary market.
Although June is still young, euro covered bond subscription ratios have fallen from an average of 3.2 in May to 2.3 this month, according to GlobalCapital’s Primary Market Monitor. Meanwhile, new issue premiums are on the rise, climbing from an average of 0.74bp to 1.13bp over the same period.
Of course, in hindsight, everything looks better. And who could have foreseen the rampant demand from investors for covered bonds — and the accompanying deeply negative new issue premiums — in January when books were slim and concessions high despite the strong new year inflows?
But for a few good months, conditions were strong and issuers rightfully seized the chance to fill their coffers. But now, as investor fatigue sets in and the market’s focus turns towards summer on the beach, issuance is expected to slow in the coming weeks.
Volumes are dwindling. Banks issued €2.25bn of covered bonds this week, down from €6.5bn last week and €4.35bn the week before. And unlike this week, both those weeks were punctuated by public holidays across Europe.
Fret not, however, as the slowdown in supply should hopefully support spreads and spur them tighter. For months, the focus has been on the primary market, but a dearth of supply should focus buyers back onto the much-neglected secondary market. And with it, this focus on the secondary will drive spreads tighter before supply ramps up after the summer months.
Bank treasurers must channel Dr Seuss: don’t cry because the months of big books and low premiums are over, smile because they happened. There are many ways to carve up a successful deal — tight new issue concessions and swollen order books only tell part of the story.