Euro

Covered bonds will continue to play a prominent part in investor portfolios next year, according to a survey by Natixis. More than 80% of investors also expressed interest in structured covered bonds, though buy-siders away from the survey reckon the level of demand may be overstated, as given the choice buyers will prefer traditional covered bonds.

Covered bonds have been less liquid than RMBS this year, new analysis by Bank of America Merrill Lynch shows.The controversial finding underscores the impression that European RMBS should become eligible for inclusion in Basel III’s Liquidity Coverage Ratio. The case for RMBS inclusion is further underscored by the fact that banks have few funding options, as the senior unsecured market remains practically closed just as heavy government guaranteed redemptions fall due next year.

With a €600bn maturity mountain to scale next year, half of which is in the comatose senior unsecured sector and the remainder split between covered bonds and government guaranteed debt, European banks had been hoping to proportionally increase their covered bond funding. But this avenue has also been constricted and alternatives must now be considered. Covered bonds that might have been publicly placed are now being pledged for bilaterally negotiated repo trades and ECB repos. In addition banks are aggressively deleveraging.

Secondary market activity has slowed considerably as banks wind down their balance sheets ahead of the year end. Market making is still happening but flows are skewed to the bid side, with bids so low that few investors are prepared to deal on them.

Moody’s has downgraded Credito Emiliano’s mortgage covered bonds from Aaa to Aa1 and Intesa Sanpaolo’s public sector covered bonds from Aa1 to Aa3, following reassessment of over-collateralisation (OC) levels in both programmes.

Fitch has downgraded Banco Popolare di Milano’s OBGs from AAA to AA+ and kept them on rating watch negative because of a downgrade of BPM and seven other Italian banks on November 25.

Covered bond participants are anxiously looking to developments in the wider market in the hope that a resolution to the sovereign impasse is found. But, in the event nothing is agreed, contingency plans are now being made. Some syndicate bankers are hoping that the EU summit meeting in Brussels on December 9 will yield progress. Tap issuance is possible, but with the market as it is some bank holders believe there is more sense in remaining short some bonds.

As primary supply remains elusive, focus is shifting towards the New Year and the question of whether issuance will resume when the market restarts in January. Syndicate bankers were reluctant to suggest either a solid reopening, or continuing malaise.

Commonwealth Bank of Australia has confirmed that it is monitoring the market, and though this does not constitute a delay to its inaugural euro benchmark, it may in practice amount to that, given difficult market conditions. ANZ and Westpac’s dollar deals both continue to trade soft amidst talk that leads are holding significant dollar covered bond inventory.

The ECB’s second purchase programme was one week old last Friday, having taken its first faltering steps on November 11. Its progress has been far from heartening.

Realkredit Denmark kicked off the Danish auction season on Monday, with sales in both euros and Danish kroner.