The covered bond market welcomed last month a proposal by the Canadian bank watchdog that could lead to regulatory equivalence between Canada and Europe, two of the biggest covered bond markets.
Market leaders saw this as potentially the first of many equivalence deals between covered bond jurisdictions that could make covered bonds much more relevant for international investors and issuers.
It was being talked about in hushed tones as a watershed moment for the asset class, heralding a bright new future at the centre of the international bond markets.
While there is nothing wrong with a bit of enthusiasm — and these experts may of course be proved right — international equivalence would present both opportunities and challenges.
Equivalence with Canada could lead to similar agreements with Australia, Singapore and South Korea for example, which would require the largely European covered bond market to increase its coverage to support better these distant markets.
The internationalisation of the covered bond market might also call into question some of the covered bond market’s more traditional conventions such as its observation of European public holidays and, even, a long summer break.
With the season almost upon us, it is timely to note the covered bond market tends to shut down before and open up after all of the other (more international) bond markets each summer.
Last year was a good example. The last covered bond issued in July was on July 7 and the first printed the following month came on August 18, according to GlobalCapital’s Primary Market Monitor, which was a gap of 28 working days.
By comparison, the next biggest break over the summer was 18 days in the sovereign, supranational and agency bond market, followed by 10 days in FIG a meagre and eight days in corporate bonds.
The volume of covered bonds issued over the summer is also lower than in other markets. There were just €3bn of covered bonds issued in July last year, for example, compared to €11.4bn in FIG, €16.5bn of corporate bonds and over €20bn of SSAs, according to PMM.
The greater internationalsation of the covered bond market is attractive on one level but market participants should be careful what they wish for. New issuers and investors with more business to do may not have the same healthy respect for a restful summer as the market's current population.