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Dealers are already running low on covered bond inventory and with this year’s first rush of new issues now done, a squeeze is already starting to get underway.
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Investors in US banks might be looking forward to regulatory easing under President Trump’s administration, backed by a Republican Congress. They might eventually see some benefit, but a steeper yield curve is much more important.
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After a glut of long-dated covered bonds in 2016, investors are scrambling to bring the duration of their portfolio down again, and that means five year covered bonds are likely to remain a firm favourite. More issuers should turn down the ECB's TLTRO, and try covered bonds instead.
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Rather than waiting for the final go-ahead from the authorities, European banks are becoming creative with their bonds in order to bring total loss-absorbing capacity (TLAC) issuance.
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Everyone in debt capital markets has heard of green bonds, and most in the financial world accept that sustainability and greenness are Good Things. But for all the grand commitments and PR initiatives, understanding of the issues is still as hazy as a Beijing smog. -
If Banca Monte dei Paschi di Siena (MPS) is able to wrangle a recapitalisation that looks more like a bail-out than a bail-in, it will set a precedent for Europe's other weakest banks.
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With yields set to rise and spreads likely to widen, covered bond issuers should waste no time in getting ahead on 2017’s funding plans and doing the more difficult trades first.
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Europe’s bank recovery and resolution directive (BRRD) could face an important first test this month if Banca Monte dei Paschi di Siena fails to complete its rescue plan. But market participants should not completely write off the new framework, even if the bail-in process does not pan out how they had hoped.
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Making senior debt explicitly bail-inable fundamentally changes the risk profile of the asset class. Investors must not take that shift lightly.
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