Euro

With a pall of misery hanging over the covered bond market, Cariparma’s debut covered bond, which could be launched next week, could be the final primary issue of the year.

WL Bank launched a covered bond into a weak secondary market on Thursday, pricing a five year close to where its 10 year had been trading. Screen prices give the illusion that spreads are holding steady, but in reality banks are scrambling to cut inventory and sales are being made below screen bids. But with primary activity likely to dry up, redemptions set to rise and ECB buying unlikely to slow down, the balance of flows will turn and spreads will tighten, said bankers.

Credit Suisse has published a consent solicitation in which it proposes changing the maturity of its outstanding covered bonds from a hard bullet to a soft bullet. Though the market does not price for this difference, the issuer is willing to pay investors five cents to agree to the change.

The covered bond market had a watershed moment on Friday when OP Mortgage Bank launched its 10 year. Despite an attractive spread, the deal was unable to get the sort of traction that the issuer may have hoped for. It was no coincidence that as books opened, ECB president, Mario Draghi, raised the prospect of full scale sovereign quantitative easing — something that is likely to make covered bonds look relatively expensive to government bonds.

Covered bond spreads continued to fall in the primary market as Belfius Bank and Landesbank Hessen-Thueringen Girozentrale (Helaba) issued benchmark euro deals at record low funding levels on Thursday. The German issuer provided the Bundesbank with its first opportunity to purchase a benchmark domestic deal.

A newly proposed legal framework for the Spanish Cédulas market could lead to less overcollateralization, which would in turn lead to downgrades of at least one notch, said Fitch on Thursday. But the introduction of a 12 month liquidity facility could lower the mismatch risk between assets and liabilities leading to a one notch rating improvement, the agency added.

Belfius Bank has mandated leads for its second public sector covered bond and its fourth covered bond of the year. The issue is expected to be launched into a softer market, with bankers widely reporting that offers have cheapened, particularly at the long end of the French curve and in the periphery.

Crédit Agricole returned to the covered bond market for the first time this year to issue a €1bn eight year. Demand as fair, but less spectacular than deals seen two weeks ago, as the agency and sovereign sector now offer better value. Leads stressed the quality of real money interest, a large portion of which is likely to have been from the Banque de France.

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.