Euro

European credit markets opened on the back foot on Monday but the financial institutional pipeline is the best it has been all year. Despite summer holiday season approaching, issuers are likely to return when conditions have stabilised. This could occur next week when investors will have cash to deploy after an expected surge in fixed income redemptions, said bankers.

Three German borrowers issued benchmark covered bond deals this week with variable results. The transactions illustrated that German investors have become more discerning since May 22 when Federal Reserve chairman Ben Bernanke revealed that he was considering scaling down the Fed’s bond-buying programme.

Aareal Bank priced the covered bond market’s fourth Pfandbrief in a row in on Wednesday. It was unable to tighten pricing from guidance but drew enough demand for its €500m no-grow deal.

Commerzbank plans to be a regular public sector Pfandbrief issuer following its inaugural deal this week and it is working on a new mortgage backed programme, it told The Cover on Wednesday.

Two issuers joined the primary covered bond pipeline on Tuesday, improving the market outlook. Caisse Francaise de Financement Local (Caffil) and Raiffeisenlandesbank Niederösterreich-Wien AG have both mandated banks for deals, which will be preceded by roadshows

The outlook for primary covered bond issuance is expected to improve next week as the market has begun to stabilise and issuers will look to take advantage of the short funding window that precedes summer. And with the longer term outlook expected to be less certain there is less incentive to postpone issuance.

Triple-A covered bonds are underperforming triple-B, while Spanish multi-Cédulas are outperforming single-name, Markit iBoxx indices show. But the relative performance is due to the better liquidity of stronger credits, traders warned, and market prices would not reflect index spreads.

Selling continued in the secondary market on Tuesday, covered bond dealers said, with French, Norwegian and UK bonds hardest hit. German, Swedish and Finnish markets have held in better.

Finland’s Aktia Bank mandated leads on Monday for its first covered bond, that Moody’s has provisionally rated Aaa. Despite high quality collateral, the covered bond rating is vulnerable to a downgrade of the borrower.

Secondary market selling of covered bonds slowed a little on Friday ahead of the US payrolls report. But bankers say the US data won’t make much of a difference as further selling is likely. In the primary market there is concern that if a deal is incorrectly priced, it will add to problems and potentially close the funding window for other issuers

Covered bonds backed by loans to small and medium-sized enterprises (SMEs) are gaining traction as a funding tool for European banks and could soon become a feature in Italy, Spain and France, according to Moody’s.

Cover pool encumbrance was steady last year versus the previous year, Fitch said on Thursday. The most stable levels were among the most encumbered institutions, where covered bonds have made up a large share of their financing for a long time.