Europe

Dealers and investors remain shell shocked by recent events. Despite relatively upbeat comments from the buy side and a continuation of the spread correction, reported secondary activity has been muted. Syndicate bankers are looking towards stabilisation of the Bund/swap spread and do not rule out the prospect of issuance, though it may be limited to taps.

The covered bonds of Portuguese and Irish banks are drawing ever closer to sub investment grade status, though they are likely safe for the summer. Moody’s on Tuesday cut Ireland from Baa3 to Ba1 and assigned a Timely Payment Indicator (TPI) of Very Improbable to all Portuguese mortgage backed covered bonds. Some banks are rated only by Moody’s, though should the sub investment rating Rubicon be crossed, analysts expect the ECB to alter its criteria for repo eligible collateral.

Secondary market dealers reported little trading activity on Tuesday and described the market as being dysfunctional. Despite that, some participants are trying to take advantage of this price opacity. After opening very weak, the market has bounced back on rumoured central bank intervention.

The market has been pricing in a catastrophic scenario of sovereign default for some months, but the largest swing in sentiment, where Delta is now at its highest, is in Italy. In the last three trading sessions, Italian government bonds have significantly underperformed German bonds. The five year spread is now 379bp, having widened 140bp in the last week and 40bp since Monday night’s close. Italian government bonds and liquid bank stocks have been aggressively shorted and as a consequence covered bonds have been severely hit.

Hopes for further covered bond issuance have been dashed by peripheral volatility centring around Italy and poor US employment figures, which have weakened market sentiment across asset classes. Prospective issuers are electing to wait, and with holidays in core Europe fast approaching, benchmark supply appears unlikely.

Covered bond research analyst Ralf Burmeister, who is currently on paternity leave with Landesbank Baden-Württemberg, is due to switch to the buy-side and will start his new role in September. His decision to leave LBBW’s covered bond research team follows the departures of former colleagues, Jan King and Florian Eichert.

Matej Chytil has joined Crédit Agricole’s covered bond trading team from National Bank of Slovakia. He is working on the Jumbo trading desk alongside Gavin Jackson and reports to Mariano Goldfischer who is head of trading at the firm.

Crédit Mutuel CIC tapped the market for the second time this week on Friday, and Hungarian issuer OTP Mortgage Bank mandated banks for its first benchmark transaction in three years. Despite renewed volatility in the periphery, syndicate officials said the covered bond market could remain open for core issuance, given strong non-farm payroll data, and a conducive yield environment.

Fitch downgraded Spanish issuers Bankinter and Banco Popular Español on Wednesday. Bankinter was cut from A to BBB+, on stable outlook, and Fitch has now withdrawn all ratings assigned to the borrower. Banco Popular Español was lowered from A- to A, on negative outlook.

Though the covered bond market remained quiet on Thursday, syndicate officials stressed it had not yet closed for summer. Investors still have cash to put to work, and there is at least one trade expected next week. Negative rating action has damaged market sentiment, however, and closed the window for some peripheral names. Prospective issuers face a forbidding market and increased premiums should they decided to issue.

Most German covered bond investors prefer maturities of five years or less, while liquidity and ratings remain important to them, a new DZ Bank survey has revealed.

Most German covered bond investors prefer maturities of five years or less, while liquidity and ratings remain important to them, a new DZ Bank survey has revealed.