Euro

UniCredit Bank Czech & Slovakia has mandated its own investment bank for a roadshow later this month and expects to issue a euro benchmark deal. The transaction follows the successful placement of a Czech covered bond from Raiffeisen’s subsidiary in October, and a domestically targeted deal from UniCredit subsidiary a year ago.

The covered bond market was trading more softly on Friday with equity markets lower and Bunds firmer. Though recent issuance has traded down, bankers reckon a rapidly shrinking funding window for 2014 means deals will still come next week.

The covered bond market has started to lose some of the energy and excitement that followed the announcement of the European Central Bank’s purchase programme. As the bid for Santander’s Cédulas widened the day after launch on Thursday, BPCE issued a finely tuned deal that was sized closely to demand.

Santander returned to the covered bond market on Wednesday after a 21 month absence with a dual tranche offering that included a 20 year tranche, a duration that has not been seen from a Spanish issuer for at least five years, and which responds to unsated demand from insurance firms.

Australia and New Zealand Bank returned to the covered bond market on Wednesday to issue the tightest ever deal issued by an Australian bank in euros. The five year transaction nevertheless offered a decent pick-up to where covered bonds issued by eurozone banks have been priced and the issuer’s curve.

Australia and New Zealand Bank mandated joint leads for its second euro covered bond of the year and the fifth Australian benchmark in euros this year. The deal is expected to be launched on Wednesday, and should offer a premium relative to its own curve and a much larger premium to deals from eurozone borrowers.

Covered bonds issuers in core and peripheral Europe will be aiming to finalise their 2014 funding needs in the next two weeks and others may be considering bringing forward their 2015 funding. As Irish and Belgian banks have been less active so far this year, there is a fair chance of supply from these regions. Covered bond research analysts have also recently reported on these markets.

The Bundesbank got its first chance to buy in the primary market on Monday when Landesbank Baden-Wuerttemberg priced a €250m four year Pfandbrief tap. The increase gave a fairly clear indication on the spread level at which public sector demand swamps the private sector and comes amid concern over a bond’s liquidity if the eurosystem’s ownership of a single bond hits its 70% maximum.

The European Central Bank's covered bond purchase programme (CBPP3) turned relative value upside down this week, with a French deal pricing inside a similar Swedish offering, among a crop of four new issues.

The Financial Stability Board’s proposals outlining total loss absorbing capacity for financial institutions will make issuers prioritise unsecured over secured funding, boding poorly for the supply outlook in covered bond. They may also dampen bank lending, suggesting ultra-accommodative monetary policy will be needed to offset further economic retrenchment.

Covered bond spreads were steady on Thursday, but with buyers and sellers evenly balanced, traders had the impression that the Street was long of inventory. The European Central bank is expected to maintain a dovish line at its policy meeting on Thursday but will fall short of concrete measures, said bankers.

Primary covered bond issuance is expected to resume next week when Thursday’s European Central Bank meeting and Friday’s non-farm payroll data will be known. In the meantime, bankers bemoaned the distortive pricing impact of the ECB’s purchase programme, which is expected to lose momentum unless it takes a greater slice of the market.