As weaker European growth pushes back the timetable for rate hikes, the ECB’s main leverage to wean banks off its Targeted Longer-Term Refinancing Operations (TLTRO) will be to shorten the duration of its new facility.
Some banks have already taken advantage of strong market conditions to term out TLTRO II funding with the cheapest alternative. This may explain why covered bond volumes surged to €37bn in January, the highest in eight years. Even so, many have been absent and others have been too timid.
Deutsche Bank, for example, recently announced plans to issue up to €6bn covered bonds this year. Even though it had demand for much more, it has only issued €1bn so far. Tellingly, it said that “in the event that the ECB announces a TLTRO successor… we may reassess our issuance”.
But Deutsche should be applauded. Even though Spain’s banks were among the largest takers of TLTRO II, Deutsche’s Spanish subsidiary has been the only Cédulas issuer this year. The same goes for Italian banks which, apart from two, have been absent. Greek and Portuguese banks have not shown up either.
Some issuers may believe they are better off waiting for the ECB rather than issuing a covered bond now. But when the ECB turns up with a new tight-fisted repo scheme, market conditions will be hit and the rise in supply that follows will only make it worse.