Currencies

The fight for the Danish mortgage system will continue, as CRD IV proposals released on Wednesday left undefined which assets would qualify as Level 1 or Level 2 as part of Basel III’s Liquidity Coverage Ratio (LCR).

Fitch became the latest rating agency to downgrade bonds to the border of sub investment grade on Thursday, when it cut the covered bonds of four Greek banks. Its leniency relative to Moody’s, which already rates the covered bonds concerned sub investment grade, means the bonds remain repo eligible.

Investors have plenty of cash to put to work and there is scope for modest issuance next week if stable market conditions prevail but thereafter the funding window is expected to move to late August. In the secondary market, spreads are slightly wider but activity is mostly confined to price checking. Italian auctions went well, breeding a little confidence but overall conditions still remain nervous.

The market has been pricing in a catastrophic scenario of sovereign default for some months, but the largest swing in sentiment, where Delta is now at its highest, is in Italy. In the last three trading sessions, Italian government bonds have significantly underperformed German bonds. The five year spread is now 379bp, having widened 140bp in the last week and 40bp since Monday night’s close. Italian government bonds and liquid bank stocks have been aggressively shorted and as a consequence covered bonds have been severely hit.

Crédit Mutuel CIC tapped the market for the second time this week on Friday, and Hungarian issuer OTP Mortgage Bank mandated banks for its first benchmark transaction in three years. Despite renewed volatility in the periphery, syndicate officials said the covered bond market could remain open for core issuance, given strong non-farm payroll data, and a conducive yield environment.

After mandating leads for a Eu1bn 10 year public sector backed Pfandbrief on Tuesday, Bayerische Landesbank said on Wednesday that it had decided to postpone the transaction because of an announcement by Moody’s on Monday that the bank would remain under review for downgrade.

The primary market has been dominated by core supply particularly weighted towards the long end, but a real test of tier two bank issuance, or tier one names from peripheral jurisdictions, has yet to be seen. The timing could be about right for UK, Spanish and Italian deals to enter the market.

Finland’s OP Mortgage Bank came to market on Friday with the first seven year Scandinavian covered bond of the year, pricing a no-grow Eu1bn trade. Despite the bank’s prime Scandinavian collateral, the transaction fell just short of Eu1bn of orders.

LBBW sold its inaugural public mortgage backed transaction on Monday, the first borrower to bring a deal on a Monday morning since late March. A long awaited trade from Crédit Mutuel CIC Home Loan was also announced. Leads took indications of interest this morning for the borrower’s debut Obligations à l'Habitat, which follows BNP Paribas’ first euro outing in the OH format at the end of last week.

BNP Home Loan SFH will price its first euro covered bond under the new Obligations de Financement de l'Habitat format later today. The first benchmark deal since the Greek parliament approved austerity measures on Wednesday, BNP’s 10 year Jumbo appeared entirely unaffected by any residual market concerns, drawing Eu2.7bn of orders from over 100 accounts.

After more than a week without primary euro issuance, BNP Paribas and OP Mortgage Bank on Friday broke ranks and opened books on 10 a year and seven year deal respectively. BNP closed books on a well received Eu2bn transaction by mid-morning, while execution on OP’s Eu1bn no-grow deal was less straightforward.

Following a transfer of La Caixa’s banking activities to CaixaBank, Moody’s has assigned a Aaa rating to mortgage backed covered bonds now assumed by CaixaBank.