Euro

Covered bond yields continued to tumble this week with coupons from German and French euro issuers skimming just above zero, at 0.025% and 0.125% respectively. Meanwhile, in Switzerland the first Swiss franc covered bond was issued with a negative yield of 0.37%. The deals may be good news for the issuers concerned, but investors are hurting. And by forcing them down the credit curve the seeds of the next crisis are potentially being sown.

The European Central Bank now holds 12% of euro area outstanding benchmark covered bonds, which are not available for repo, and have been bought at a time of rising structural demand and falling net issuance. As a result, the ECB’s actions have made a bad liquidity situation much worse, said Barclays covered bond research in a report on Thursday.

20 covered bond issuers defaulted in the 10 years to the end of 2013, but no covered bond experienced a default, said Moody’s in a special comment on covered bond rating transition rates. Covered bond ratings, which exhibited a lower rate of downgrades than issuer ratings, began to stabilise in 2013

NordLB has issued a four year public sector backed Pfandbrief on a very well oversubscribed book at the lowest ever coupon and at an extraordinarily tight spread. The deal, which comes in the bank’s 250th anniversary, is likely highlight relative value to the planned issuance of its inaugural benchmark Lettre de Gage, which will also be backed by public sector assets.

National Australia Bank issued its first euro benchmark covered bond of the year, and by choosing a maturity that would offer investors a relatively attractive yield, the issuer ensured a strong reception.

The covered bond market continued to perform on Wednesday, but the shortage of paper has led to a deterioration in liquidity, and this is starting to outweigh the positive sentiment that had been driven by an improvement in relative value. The supply situation is not expected to improve much until late next week, when the German carnival season is over and Pfandbriefe could emerge.

NAB has mandated joint leads for the second euro denominated Australian covered bond of the year. A long dated transaction is envisaged and books are expected to open on Thursday.

Compagnie de Financement Foncier (CFF) priced the tightest and lowest yielding euro benchmark covered bond from a non-German issuer on Tuesday. The strong result is a testimony to the return of relative value and shows that, despite the historically low absolute yield, investors are desperate for covered bonds which are structurally under-supplied, but for which there is a durable regulatory bid.

The Swedish regulator’s proposal to lower the covered bond swap counterparty rating threshold to single A from double A is credit positive, said Moody’s on Monday. Though at odds with overall European covered bond rules in the Capital Requirements Regulation and Directive, the proposal would allow banks to continue receive preferential regulatory treatment on their covered bond investments.

The public sector French covered bond issuer, Caisse Française de Financement Local, announced on Friday that by the second quarter 2015 it will be able to add export loan collateral guaranteed by the French credit agency, Coface, to its covered bond collateral pool.

Standard and Poor’s has completed the review of Spanish mortgage covered bonds following a change in its methodology, leading to a number of upgrades. Analysts said the agency’s rating process was complex and not easy to understand.

Investors were eager to buy Vorarlberger Landes-Und Hypothekenbank’s mortgage-backed Pfandbrief on Wednesday. The deal’s success suggests few were worried about the issuer’s Swiss franc exposure, possibly because the income of many obligors is also in Swiss francs.