Covered bond borrowers must get ahead on funding plans
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Covered Bonds

Covered bond borrowers must get ahead on funding plans

With yields set to rise and spreads likely to widen, covered bond issuers should waste no time in getting ahead on 2017’s funding plans and doing the more difficult trades first.

In the final quarter of 2016 10 year Bund yields rose by over 50bp to around 40bp, and though they have since moved lower again, many analysts believe rates will head north in the medium term.

Much will depend on the trajectory of inflation, but with oil prices teetering around $60 a barrel, the new US administration potentially planning a large fiscal stimulus and the European Central Bank slowing its monthly rate of asset purchases, the case for lower long term rates from here on does not look very convincing.

At the end of last year, this concern was uppermost in the minds of some borrowers. Towards the end of the year, issuers spurned the long end of the curve to issue in the more defensive five year tenor where four of the last five covered bond deals of the year were launched.

But with redemptions running high and investors having plenty of cash to deploy in the new year, appetite for more difficult trades with long durations has returned.

On Tuesday, Caffil and CaixaBank issued €1.5bn 10 year trades, deals that simply could not have been done a few weeks ago. Though LBBW chose a seven year tenor instead, the €1bn trade was one of only three €1bn+ trades it has issued since 2011.

The three deals, along with another 15 year benchmark mandated by ABN on Tuesday for launch on Wednesday, show that borrowers are taking as much funding off the table as they can, while they can, and making sure they do the more difficult longer duration deals first.

Though timing the moves in rates markets over the forthcoming months won't be easy, issuers will want to minimise risks as much as possible, especially when it comes to politics.

2016 delivered some unexpected results in the UK’s vote to leave Europe and Donald Trump’s presidential election win. Although the market took the votes in its stride, the real impacts of each result has yet to be felt.

The effects of UK’s vote to leave the EU will emerge from detailed negotiations, following the formal triggering of divorce proceedings, which the UK government intends to start in March.

Not long after that, speculation on the outcome of French, Dutch and German elections is likely to start building, suggesting political risk is likely to become a more permanent feature this year.

But until January 20 when Trump takes office, there is very little political risk, so for issuers that can, that means 12 clear trading days to cram in as much long dated funding as possible.

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