Euro

A better gauge of the depth of covered bond demand is likely this week, as bank arrangers test appetite for slightly more challenged credits. Of the four deals currently in the market, three are not considered the best or easiest names to sell — not that that should necessarily be a problem — provided the spread is right.

The covered bond market enjoyed its busiest week since this time last year, with 10 issuers raising a collective €15bn versus the 15 borrowers who raised €18.5bn in the first week of 2011. But if past form is a guide, the rush of new issuance does not in any way indicate that the markets will remain buoyant in the longer term.

National Australia Bank launched its debut syndicated covered bond in euros on Thursday, a day after Commonwealth Bank of Australia sold an impressive €1.5bn inaugural trade in the same maturity and currency. The trade looks set to price at the same level as CBA, though without attracting the same demand.

National Bank of Greece is set to increase its core tier one capital by buying back its only covered bond alongside several tier one notes in a tender operation launched on Tuesday. The exercise is controversial, with some covered bond participants arguing that the modest tender price differential between the two instruments is not justified and that this undermines the intrinsic relative value of the covered bond.

The covered bond primary market has opened strongly with a trio of top tier names from core jurisdictions collectively raising around €4.5bn on comfortably oversubscribed books. A further seven deals have been mandated for issuance in the near future. This impressive showing is to be expected given liquidity is technically strong. Yet big challenges lie ahead, specifically for peripheral markets — where borrowers remain shut out.

Euro benchmark supply will drop in 2012, covered bond analysts predict, despite the product having become the cornerstone of bank funding. Rarely have analysts’ expectations diverged so far, with issuance estimates ranging from €120bn-€190bn.

Moody’s has placed five Spanish covered bond programmes on review for downgrade, after taking the same action on the issuers.

Barclays raised €750m from two taps at either end of the curve, in spite of increasing concern that Standard & Poor’s could downgrade France, several other European countries, and the EFSF.

The European Bank for Reconstruction and Development and European Investment Bank have bought the second of a three tranche SME backed covered bond from Turkey’s Sekerbank via sole lead arranger UniCredit.

On the back of reverse enquiry, Barclays Bank has launched two self led taps of its three and 10 year covered bonds by a minimum €250m each. There is some consternation that they are not fungible for 40 days, meaning existing shorts will remain exposed over the expensive year end period.

UK issuers approach 2012 sporting a strong domestic investor base and a tightened framework, having retained market access through some of the most volatile periods of 2011.

The Reserve Bank of New Zealand today published a consultation paper that proposes a legal framework for covered bonds, having worked on specific covered bond policy for over a year.