Euro

Covered bond supply surged this week with investors piling into deals that offered little new issue concession and negative spreads, leading to concern that an inflection point was at hand. However, there was no sign of investor pushback, with the tightest deals from core European issuers experiencing a high level of demand. But some bankers were left wondering just how long the superb conditions would last.

Covered bond yields and spreads are spiralling lower and the prospect that wafer thin margins become even tighter has led to a legitimate concern that a turning point may follow. But with the European Central Bank backstopping everything, and the market still offering a decent return compared to Bunds, covered bond investors should be lining up to buy for some time yet.

French covered bond regulations that improve transparency on asset liability mismatches and liquidity tests will not be made public, but they should improve supervisory oversight and lower refinancing risk for investors, said Moody’s on Friday.

Toronto-Dominion Bank smoothly executed the sixth seven year euro covered bond this week despite a Bloomberg blackout delaying the process. The larger than usual €1.25bn deal offered a decent new issue premium and attracted comfortably oversubscribed book.

The European Commission is taking steps to encourage future deals in the new asset class. It published the findings of a report on Wednesday and recommends standardising the regulatory framework.

Caffil returned to the euro covered bond market on Thursday for its second such bond of the year, offering investors a few basis points more in spread in return for a slightly longer maturity.

NIBC issued a €500m seven year conditional pass through (CPT) covered bond on Thursday, the first covered bond from a Dutch bank this year, but the second CPT structure after UniCredit. In contrast to many recently issued bullet maturities, the transaction offered a generous spread.

Länsförsäkringar Hypotek priced a €500m no-grow seven year covered bond with a roughly 2bp new issue premium on Thursday. This was the second covered bond not eligible for the European Central Bank’s purchase programme (CBPP3) issued this week following a deal from Abbey. The spread pick-up relative to CBPP3 eligible deals attracted a decent book and the maturity played to asset managers and central banks alike.

Non-core eurozone issuers are set to play an increasing part in the covered bond market as the European Central Bank (ECB) purchase programme drives yields towards new lows. While minimal new issue premiums and negative spreads have not yet deterred investors – oversubscription rates were up this week – bankers are debating if the inflection point is in sight.

La Banque Postale printed its first soft bullet euro covered bond, paying a 0bp-1bp new issue premium for its market return, and Helaba doubled the size of its 1.875% 2023s to €1bn with a tap on Tuesday.

Abbey National Treasury Services returned to the covered bond market on Tuesday to issue the second only UK covered bond of the year in euros. The rarity of UK euro issuance combined with a constructive market backdrop and a positive spread to mid-swaps propelled demand for the deal, particularly from high quality asset managers and central banks.

Deutsche Hypo returned to covered bonds for its annual benchmark on Monday, building a heavily oversubscribed book for its €500m seven year mortgage Pfandbrief in a record 10 minutes.