France

After a week of severe fluctuations in all market segments, traders said Monday morning was the quietest day in weeks. Market participants are hoping for a modicum of stability to improve the chances of primary supply at the end of the month and several issuers from core jurisdictions are finalising roadshows in order to come to market, syndicate bankers said. But if new issue premiums are at the top end of expectations, they added, it will reshape the secondary curve — and this may deter some names from returning.

French covered bonds have widened in the secondary market following concern that the sovereign could lose its triple-A rating. Meanwhile traders reported buying in Spanish and Italian covered bonds as investors move out of government paper.

Core European investors are much more pessimistic than two months ago, according to Crédit Agricole’s latest sentiment index, which showed an even greater decline in issuer sentiment. Investors expect further deterioration in Spanish and Italian covered bonds, but at a slower rate than over the last two months.

OTP Mortgage Bank priced a €750m floating rate covered bond on Wednesday, but the market is not sure what to make of the trade, which was driven by a substantial reverse enquiry and for which statistics on allocation were withheld.

Peripheral sovereign bonds are once again heading towards their recent widest spread levels but covered bonds, as usual, are lagging the move. Real money buying of peripheral covered bonds has been at levels 60bp through the government in some cases. Volumes are small, however, and bid offer spreads are wide as concerns around volatility continue to weigh in on sentiment.

After digesting the details of a rescue plan for Greece, traders have marked back Spanish and Italian sovereign debt following a brief relief rally on Friday. Secondary market activity was subdued on Monday, and though covered bond spreads have lagged sovereign tightening, making them look relatively cheap, traders said it was never enough to be market moving.

A UK based credit investor, who has participated in many of this year’s benchmark covered bond deals, talks to The Cover about the current dilemma facing Europe. He believes that throwing more money at the problem, such as through further EFSF buying, will only provide a temporary solution. Ultimately, there needs to be clear evidence that Europe’s high indebted countries are lowering their deficits. There is every chance that this will take place over the next nine months or so. Both Italy and Spain have made progress and should continue to do so, but the Spanish government is probably in the stronger position. His hopes for Greece remain dim.

Covered bond practitioners say the release of Capital Requirements Directives IV is positive for the sector and broadly similar in outlook to the draft version of Basel III that sealed a structural bank bid for the sector. There have been changes in the way covered bonds are treated by the Liquidity Coverage Ratio, and potentially in the way the Net Stable Funding Ratio is applied. Underlying market sentiment remains negative, as many believe that the sovereign debt crisis is only just beginning.

Korea Housing Finance Corporation has opened books on its second ever covered bond, a $500m five and a half year transaction. US book building has yet to commence, but with the book already twice covered on the back of strong demand from Asia and Europe, a good reception seems likely. The deal is expected to price later today.

The euro primary market remained closed on Monday. The secondary market, however, has been more active, with liquidity present for both core and peripheral paper. Even Portuguese bonds have enjoyed interest, as fast money accounts salivate over double digit yields.

BNP Paribas has launched the first dollar covered bond index that includes non-SEC registered transactions, which make up nearly all of dollar denominated covered supply. But the French bank will need market interest to legitimise the decision to include bonds that are not allowed on other leading indices, according to market participants.

A senior DCM covered bond banker talks to The Cover about the market outlook for the next six weeks which, aside from the sovereign crisis, will also encompass legislative progress on bank resolution regimes, new developments on CRD 4 and how these might impact the covered bond market.