Euro

The European Central Bank’s covered bond purchase programme entered a new phase this week as eurozone issuance enabled it to buy the primary market, rather than relying on secondary where supply is drying up. Its buying is good news for peripheral banks but may cause investors to desert the core.

Banco Sabadell returned to the covered bond market for the first time since January 2013 to launch a seven year Cedulas Hipotecarias which priced in line with Credito Emiliano's earlier deal of the same tenor. The deal was less reliant on demand from official institutions than Emiliano and will send a strong message to other peripheral issuers that may be looking to refinance liquidity borrowed under the long term refinancing operation.

Credito Emiliano became the second issuer to take advantage of the European Central Bank’s (ECB) buying programme, launching a covered bond on Thursday. The deal led to a repricing of the issuer's curve in a move that could spur other peripheral names to return to the market.

Nordea Finland has issued the first deal from a eurozone bank that is eligible for the European Central Bank’s covered bond purchase programme. Though it was priced at the tightest ever spread for a 10 year deal for a non-German issuer, investors said it offered good relative value.

Czech Raiffeisenbank opened books for the first publicly syndicated euro benchmark from the country on Wednesday and had attracted sufficient order interest at the guidance level to make a deal viable. At the same time, Toronto Dominion Bank mandated leads for its first Australian dollar benchmark.

Bank of Nova Scotia (BNS) was set to price its third euro benchmark of the year, and its fourth covered bond benchmark across all currencies, on Tuesday. The €1.25bn tranche took advantage of space created by robust Eurosystem central bank demand at the short end. Responding to reverse enquiry, the issuer also priced a £250m three year floater on a book that was twice subscribed.

Covered bonds have taken results of the European Banking Authority’s (EBA) stress tests in their stride with the most vulnerable deal of all widening just three basis points on Monday. Borrowers are expected to return to the primary market this week or early next, ahead of the European Central Bank’s November meeting and US Non-Farm Payrolls. In the meantime, the ECB announced it had bought €1.7bn of covered bonds from Monday to Wednesday last week.

The Spanish covered bond law could be set for profound change that will bring it into line with the best in show schemes. Proposals set out on Wednesday by the Spanish treasury tie into capital requirement regulations and will become unstoppable under their own momentum. The major challenge is not that investors will have less collateral protection but rather the transition process itself. Grandfathering existing deals isn’t a viable option, there would need to be a huge debt exchange of all existing bonds for new ones or a fundamental change in terms and conditions.

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.