Euro

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.

BNP Paribas became the first issuer to print a French sub-Euribor ten year on Tuesday, hot on the heels of Monday’s sub-Euribor seven year from CFF. Europe’s second largest bank skipped initial price thoughts on the triple-A deal and had the syndication wrapped up by 10:30 CET.

On Tuesday Unione di Banche Italiane (UBI Banca) priced a €1bn ten year deal a full 10bp through where its outstanding ten year print from January was trading the previous day. The spread came sharply tighter through the execution process, helped by an early order from the ECB.

Compagnie de Financement Fonciere (CFF) priced this year’s first sub-Euribor seven year euro deal on Monday. At 5bp through mid-swaps, the issuer matched the price it obtained for its smaller, but extremely well received, five year print in September. Given the issuer has already completed its funding for 2014, Monday’s €1.5bn trade represents a significant contribution to the French issuer’s 2015 funding requirement.

For the first time the European Central Bank waded into the primary market to buy covered bonds for its third purchase programme (CBPP3) this week, as eurozone issuers from the currency bloc’s core and periphery returned after a long hiatus. The central bank’s buying may not be so good for core issuers but the evidence so far suggests peripheral names who have been locked out are about to bask in its largesse.