Euro

RBS on Wednesday secured the largest order book since the European covered bond market re-opened last week, demonstrating the strength of the bid for UK covered bond paper. It was the second UK bank in as many days to print a €2bn deal, and it is the first time the borrower has secured funding with a spread over mid-swaps of less than 100bp.

The surge in covered bond issuance continued on Wednesday, with a trio of benchmarks taking issuance to more than €14bn since the market reopened in the middle of last week. Some 12 trades from 10 jurisdictions have been launched since then.

UBS was one of three issuers that came to market with a euro benchmark on Thursday, taking advantage of the first issuance window in roughly two months. The Swiss borrower secured a twice covered book for its three and a half year paper, including a significant proportion of new investors.

Despite a meeting of the world’s central bankers at Jackson Hole Nordea Bank Finland kept the primary market alive on Friday, launching a successful €1.5bn five year deal. Syndicate officials welcomed three consecutive days of primary supply, though market conditions have deteriorated since a trio of well received benchmark trades on Thursday. Secondary liquidity still leaves much to be desired, they said, and has not been helped by the attractive premiums offered by the latest issues.

UniCredit brought the Italian covered bond market back to life in dramatic fashion on Thursday, offering hopes of market access to other issuers from the jurisdiction. In addition to boasting a record high spread for an Italian issuer, UniCredit reports that the €1bn 10 year trade also carried the tightest ever spread to BTPs, pricing flat to the sovereign curve.

UniCredit reopened the Italian market once again on Thursday, to the surprise of market participants. After almost three months without Italian supply, the national champion followed ING into the 10 year segment, launching a €1bn no grow benchmark. Syndicate officials disagreed over where the deal priced relative to BTPs, with estimates ranging from flat to 10bp over.

UBS and Eurohypo tapped the short end of the curve on Thursday, leaving long dated supply to UniCredit. Swedbank issued a five year dollar benchmark. Meanwhile the pipeline continues to build, with HSBC, Nordea Bank Finland, and Deutsche Pfandbriefbank announcing roadshows ahead of planned transactions.

The focus of attention is on plunging stock markets, a falling Bund yield, worse than expected German growth and a meeting between President Sarkozy and Chancellor Merkel. Well received SSA issuance should bode well for a German or Nordic covered bond reopener but many have their doubts. Nykredit is on the road in Asia, but it’s strictly non-deal related.

EFSF guaranteed covered bonds could be one solution to dwindling access to term funding among Europe’s banks. Even if markets reopen in September, costs are likely to be high across asset classes, particularly senior unsecured, said market participants. Funding constraints may lead banks to shrink their balance sheets, and if unchecked could lead to a grinding credit crunch in the southern eurozone.

Eurohypo released its first half results on Tuesday, reporting big public finance burdens caused by the Greek debt crisis, but a positive forecast on its commercial real estate business.

Just when it looked like the covered bond primary market had closed for the summer, Hungary’s OTP Mortgage Bank announced a three year floating rate covered bond on Wednesday, the second floater in the covered market in as many days. Sole lead BNP Paribas opened books at a guidance level of three month Euribor plus 300bp.

Secondary market trading activity has slowed as bank dealers look at the whipsawing Bund/swap spread and soaring peripheral government yields. There has been some small selling in Italian bonds but covered bonds continue to outperform their respective sovereign debt markets and are becoming increasingly detached.