Euro

HSH Nordbank returned to the covered bond market on Monday opening books for its first benchmark Schiffspfandbrief in five years. The short maturity, eye-catching spread and heavily overcollateralised pool of low LTV shipping loans suggests the transaction offers compelling value compared to mortgage Pfandbriefe.

Lulled into a false sense of security by the European Central Bank’s quantitative easing programme, investors seem to think they are immune from events in Greece. It’s certainly true that markets are in much better shape than they were when the country was first bailed out in 2010. Investors in AIB Mortgage Bank’s latest deal would probably vouch for that.

The European Commission is set to commence a consultation towards setting up a Capital Markets Union by 2019. The European Covered Bond Council (ECBC) plans a panel discussion on the topic in Brussels in February shortly after the official release of a “Green paper,” a copy of which was leaked to the press earlier this week. A second consultation, specifically alluding to the role of covered bonds is expected in June.

Erste Bank’s first covered bond in three years issued on Thursday was nearly three times subscribed in less than an hour. The rollicking result showed it was unaffected by mounting concerns in the Austrian bank sector generally, and over its peer Raiffeisen Bank in particular.

Core covered bond markets are well supported and, with Bund yields tumbling, they now offer exceptional value to established triple A investors, said dealers on Thursday. Though peripheral covered bonds have so far held in, uncertainty is greater and sentiment is more mixed.

Last week the ECB doubled its weekly covered bond purchasing rate to over €4bn, in line with the surge in primary issuance. Most analysts think the ECB will moderate the rate of covered bond purchases from March, when it will be able expand its balance sheet more rapidly with sovereign purchases, but not everyone is in agreement.

After pulling a 10 year deal last year, AIB Mortgage Bank returned to the market on Tuesday to price a very successful seven year. At the same time its Spanish peer, Bankinter, chose to issue in the same 10 year maturity that foiled AIB last year. Both banks achieved a solid result suggesting better quality peripheral covered bond issuers have not been affected by events in Greece.

Faced with shrinking yields, covered bond investors have been deserting the market. Unless the ECB moves out of the way and switches to sovereign purchases fast, there is a real risk that these buyers will not be there when the extraordinary stimulus measures now being delivered are taken away.

A majority of covered bond investors polled by Fitch in December 2014 say the market’s greatest challenge is decreasing secondary market liquidity. The rating agency expects the most pronounced illiquidity from June 2016, which could feed through to the credit quality of covered bond programmes, as refinancing becomes more difficult.

The larger than expected quantitative easing programme announced by the European Central Bank on Thursday has turbo-charged the well-established bull flattening trend in covered bonds and trading volumes have tripled from earlier in the week. With the long end of French market now offering a tempting spread to OATs, real money buyers are set to return. And with Bonos and BTPs rallying hard, relative value between covered bonds and sovereigns should soon be restored in the Cédulas and Obbligazioni Bancarie Garantite markets.

NordLB will start engaging with investors from mid-February regarding plans to sell its Lettre de Gage Publique. The issuer may also update investors about its merger plans, which could ultimately result in a wider pool of assets being financed under the Luxembourg covered bond law. Around the same time Goldman Sachs is likely to be reconsidering how to approach the market with its FIGSCO deal. The two issuers’ very different approaches show there is still great scope for innovation in dual recourse instruments.

Moody’s upgraded 12 Italian and Spanish covered bonds into “Aa” territory after the close on Wednesday, taking the bonds from category 2A to 1B in the liquidity coverage ratio (LCR). Though this should theoretically improve bank demand, last week’s LCR impact study published by the European Banking Authority (EBA) showed most banks had already met their minimum LCR requirement, suggesting scope for an improvement in appetite will be limited.