Euro

Lloyds defied mounting concerns over the outcome of this June’s UK referendum on whether to remain in the EU, raising €1.25bn of seven year funding on Monday. At the same time Leeds Building Society announced plans to issue its first deal in euros.

The number of new covered bond issuers grew to five this year after Standard and Poor’s assigned a preliminary AAA rating to the covered bond programme of The Mortgage Society of Finland.

Covered bonds have had a great start to 2016, in terms of supply, spread performance, and participation in the market from real money investors, but this trend is unlikely to hold. Central bank action, once again, will corrode the market from both supply and demand sides.

Rabobank has announced the sale of a €1bn portfolio of mortgages in a move that has pre-positioned the bank for tougher Basel IV regulations. By the time the rules are in force in Europe though, they may look different, especially for countries that are heavy users of covered bonds.

Bankers have yet to be convinced that the merger between Italy’s Banco Popolare Società Cooperativa (BPSC) and Banca Popolare di Milano (BPIM) will be especially positive, though Moody’s says it is good news. The borrowers recently issued covered bonds have tightened in line with the rest of Italy, but they have not outperformed and still trade wider than reoffer.

Euro denominated supply has been strong this year with as much as €66bn issued until last week according to Dealogic. However as the market heads into the second quarter, it is almost certain that volumes will fall — potentially quite sharply.

The vibrancy of the covered bond market was in no doubt as the first quarter of 2016 started to draw to a close, as volumes reached their highest level in five years. Many new names were seen, a few old names returned and further expansion seems likely. But even though the covered bond market enters the second quarter on a high, several factors may undermine sentiment.

Following approval of its demerger plan, Nordea has managed to get the consent of bondholders to transfer the assets and liabilities affecting 31 of its Finnish covered bonds to a new entity with a new guarantee. However, it does not yet have investors’ consent on six remaining deals.

EAA Covered Bond Bank Plc (EAACBB), an Irish covered bond issuer and subsidiary of Erste Abwicklungsanstalt, which was formally a part of WestLB Ireland, has been given the authority to proceed with its sale.

Banco Popolare Sondrio returned to the covered bond market for its second ever deal on Wednesday. The substantially oversubscribed transaction was priced close to fair value reflecting a concern that peripheral supply could dry up.

Regulations that have heavily favoured covered bonds over the European securitization market, and that have little foundation in prudential risk, are storing problems for the future. A report published on Tuesday by the Dutch central bank illustrating the regulatory desecration of the securitization market shows that nothing has changed.

Covered bonds have become a larger source of funding for Dutch banks than securitisations, according the Dutch central bank.