Euro

The Spanish Treasury is proposing to change the country’s covered bond legal framework and on Wednesday asked for feedback from stakeholders by November 24. The move may result in a new regime in which bonds are backed by a tightly defined indexed pool of ring fenced homogenous assets. Though this will result in less collateral, a vast improvement in the quality is likely.

Coventry Building Society returned to the covered bond market for the first time in three years to take advantage of better market conditions than those that prevailed mid-week, and execute a trade before Sunday’s Asset Quality Review and stress test results are out, which could potentially disrupt the broader FIG market. Though there was some sensitivity in the book, the small deal size meant it was able price 2bp inside the tight end of initial guidance, an achievement that would have been unlikely with a €1bn trade.

Toronto Dominion returned to the euro covered bond market for the second time this year, pricing the third seven year from an issuer outside the eurozone this week. The spread TD achieved reflected the importance of regulatory treatment, since better treatment allowed Nationwide to price tighter, and worse treatment forced Commonwealth Bank of Australia to price wider.

Of the national central banks which are buying covered bonds as part of the ECB’s covered bond purchase programme, the Bundesbank has been the most active by a large margin, said two covered bond traders. It is said to have accounted for around a quarter of queries in the secondary market from Monday through to 12pm BST on Wednesday.

Nationwide Building Society’s third covered bond of the year had to offer an attractive new issue premium because there was considerable price sensitivity in the book. The deal illustrates that, despite a technical undersupply of covered bonds, there is a greater balance between supply and demand than perceived, especially for bonds ineligible for the European Central Bank’s purchase programme.

Commonwealth Bank of Australia (CBA) was set to price Australia’s first euro benchmark covered bond in single digit territory over mid-swaps on Tuesday. The deal, which was announced at short notice and which was slow to build early traction, nevertheless managed to attract new investors, though at 14%, bank demand was disappointing given the bonds are now eligible for their liquidity buffers.

The national central banks of France, Portugal and Spain were reported buying covered bonds issued by banks from their own jurisdictions on Monday, said dealers. The amounts were small and the purchases were price sensitive, they added. Offers in Banca Monte Paschi Siena’s covered bonds were unchanged as its shares came under pressure following reports it may need to raise €1.7bn in fresh capital.

On Friday Fitch put the AA+ rated covered bond programmes of Caffil and CoFF, and the public sector programme of BNP Paribas, on rating watch negative (RWN), following an identical action on the French sovereign earlier last week.

The legal document approving the European Central Bank’s third covered bond purchase programme was published on Friday and takes effect on Saturday, suggesting it would be permitted to start buying covered bonds from Monday. The ECB told The Cover that the legal act was a mere formality and comes as secondary markets have begun to stabilise after volatility earlier this week.

On Thursday the secondary covered market found itself caught between a tumultuous peripheral sovereign market and fevered anticipation of the ECB finally wading into the covered bond market. While traders reported light profit taking in Spanish and Italian names, the strong bid that was seen for periphery names over the last week has evaporated.

S&P downgraded a number of Cédulas Hipotecarias and upgraded one Cédulas Territoriales as it begins to implement its sovereign ceiling methodology. The new ratings are now broadly in line with the other agencies and were expected. The agency is expected to announce revisions to Italian covered bond ratings that are also likely to lead to two downgrades.

La Caisse Centrale Desjardins du Quebec (CCDQ) was back in the euro market on Wednesday with its second five year legislative covered bond of 2014, this time achieving a solid book and pricing at the tight end of guidance. The positive result was in contrast to its disappointing inaugural deal in March. Wednesday’s deal was priced at an expected 2bp pick-up over the stronger Canadian Imperial Bank of Canada’s (CIBC’s) five year trade last Wednesday.