France

Covered bonds are more stable, higher yielding and offer better protection than sovereign paper, according to Barclays analysts. But liquidity and security also drive investment decisions, and negative government bond yields show how much the market values both, an investor told The Cover.

European covered bond issuers, along with senior unsecured financials and investment grade corporates, were this week presented with excellent funding conditions, despite a ratcheting-up of pressure on Spain and Italy in the early part of the week.

Deutsche Pfandbriefbank (Pbb) on Monday returned to the covered bond market for the fourth time this year, tapping an outstanding seven year deal. Secondary demand has sent core spreads tighter across the board, and syndicate bankers expect more issuers to take advantage of an exceptionally attractive primary market.

Secondary covered bonds spreads are grinding tighter as buyers faced with negative yields in the sovereign market drive short dated covered yields towards zero. While core jurisdictions wallow in a sea of demand, investors are still averse to peripheral paper, but the wide spread gap could cause Spanish and Italian spreads to bounce back, said bankers.

Increasing reliance on secured issuance and the impact that this has on senior unsecured recoveries could be factored into ratings, Fitch said on Thursday, though it added that the increase in outstanding covered bond issuance is relatively stable for the time being.

There has been plenty of interest in core and even peripheral names in the secondary market this week, especially at the long end, where investors have been tempted by juicy Spanish yields. A briefly negative basis in covered versus CDS spurred interest.

Swedish banks head a group of possible covered bond issuers, despite resurgent volatility. The Swedes have largely stayed away from the euro market so far this year, opting instead to rely on domestic demand. But analysts still expect the need for diversification and name recognition among Swedish banks to yield euro benchmarks.

After a flurry of trades from four jurisdictions during the covered bond market’s busiest week in months, the Spanish sovereign downgrade foiled hopes for further issuance on Thursday. But German Pfandbriefe issuers have thrived on volatility, while Caisse de Refinancement de l’Habitat has demonstrated the thirst for yield among European investors. As such the setback in core supply should be merely temporary.

Caisse de Refinancement de l’Habitat launched the largest French covered bond in months when it tapped a 12 year trade for an impressive €750m on Wednesday. But despite evident domestic demand, follow on trades are likely to have to wait until after the Greek elections.

The recent run of Pfandbriefe looks set to continue, with at least two more German credits closely monitoring the market. Meanwhile, a rally in OATs combined with an enduring domestic bid mean the first French covered in two months could be only days away, said syndicate bankers.

The UK’s Clydesdale Bank has finished a domestic roadshow and could launch an inaugural benchmark mid-week after receiving final investor feedback on Tuesday. Australia’s Suncorp Bank, meanwhile, is expected to announce a formal mandate for its own domestic debut later in the week.

A phenomenal reception for three Pfandbrief benchmarks this week has raised hopes that fresh German trades will maintain primary momentum next week. Meanwhile, French sovereign and agency paper has tightened strongly in secondary.