Euro

The primary market sprang back to life on Tuesday, as covered bonds from lower rated issuers in Germany and Italy attracted books that were many times covered. The successful outcomes illustrated that the market was not concerned about the outcome of negotiations on the extension of the Greek debt bailout or the prospective timing of the first US rate hike.

With investors squealing at this week’s new issues that crunched spreads to record lows, next generation covered bonds could meet the sector’s increasingly desperate need for higher yielding products. Both conditional pass through (CPT) and dual recourse structures backed by small to medium sized enterprise loans or infrastructure projects are under way, bankers report.

Caixabank’s plans to acquire Banco BPI will damage the issuer’s solvency and Moody’s has put the issuer rating on negative watch. Though the rating of both its mortgage and public sector covered bonds will also be dragged down, planned changes to rating agency’s methodology should ultimately mean the ratings end up unchanged.

Despite a string of successful Austrian covered bonds launched recently, Commerzbank analysts are cautious on the outlook for Austrian banks. The analysts list a number of risks and conclude that there is still a substantial chance of more negative headlines emerging in the next few months.

Société Générale SFH issued a €500m five year Obligations de Financement de l’Habitat on Wednesday, at the tightest ever spread for a non-German issuer. The transaction was comfortably oversubscribed, and with investors increasingly alert to the risk of thin covered bond supply, the issuer paid virtually no new issue premium.

UniCredit Bank Austria closed the spread gap to one of its Austrian rivals on Wednesday when it priced a €500m 10 year covered bond. The shrinking spread difference speaks to the long term credit curve flattening trend but also shows that worries over Austrian banks’ Swiss franc exposure are no longer being factored in to pricing.

Fitch expects Australian borrowers to reduce their issuance of covered bonds by A$1.5bn to about A$16.5bn (€11.7bn) this year compared to last. Assuming just over half of this is conducted in euros, as was the case in 2014, the agency’s forecast is broadly in line with the average estimated by five covered bond analysts in December.

Hypo Real Estate has mandated Citigroup and Deutsche Bank to advise on the sale of Deutsche Pfandbriefbank, a requirement imposed on HRE after it was bailed out by the German state, according to a press release published on Tuesday afternoon.

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.