Santander 20 year joy but ECB may drive covered volatility

Santander 230x150
By Bill Thornhill
13 Nov 2014

Santander returned to covered bonds this week with its first deal in nearly two years which, by virtue of its sheer size and duration, was remarkable. The two tranche deal included a 20 year piece that has not been seen in covered bonds for seven years. This was targeted to asset managers and insurers in the private sector — in sharp contrast to many other deals such as a €250m four year tap from LBBW that the Bundesbank mostly bought. The trades rammed home the distortion the European Central Bank's purchase programme (CBPP3) is causing the covered bond market which market makers said had potential to cause considerable mark to market pain.

The eurosystem is allowed to buy up to 70% of all covered bonds in primary and secondary markets and is fully incentivised to do so. Its balance sheet shrank by more than €20bn this week but needs to expand by €1tr. As the ECB has so ...

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