Germany

The European covered bond market got off to an exceptionally strong start on Monday as LBBW, Compagnie de Financement Foncier (CFF) and BBVA launched euro benchmarks across a range of maturities, without a hiccough. The strong start bodes well for Tuesday when several more euro benchmarks including Bank of Ireland and BPER are due.

The European Central Bank is legally obliged to carry out its role as a single supervisor and its responsibility to apply resolution measures will take precedence over its position as a covered bond investor, say analysts at Barclays research. As the central bank has the power to make decisions that could be detrimental to covered bond holders, covered bond supervision should be strengthened.

Issuance of benchmark Pfandbriefe is expected to increase slightly next year, but with private placements set to decline more sharply, the overall size of the German covered bond market will shrink, said the German Association of Pfandbriefbanks (VDP).

Covered bond investors continue to be concerned about the European Central Bank’s third covered bond purchase programme, as the intervention appears to be pushing private money out of the market. Central bank allocations in recent deals have been up to 60%, and at least one cornerstone investor is gradually exiting the market.

Covered bond harmonisation must be ambitious rather than lowest common denominator, or there is little point in the project, according to a presentation at the Association for Financial Markets in Europe / Verband deutscher Pfandbriefbanken covered bond conference in Berlin.

WL Bank launched a covered bond into a weak secondary market on Thursday, pricing a five year close to where its 10 year had been trading. Screen prices give the illusion that spreads are holding steady, but in reality banks are scrambling to cut inventory and sales are being made below screen bids. But with primary activity likely to dry up, redemptions set to rise and ECB buying unlikely to slow down, the balance of flows will turn and spreads will tighten, said bankers.

Covered bond spreads continued to fall in the primary market as Belfius Bank and Landesbank Hessen-Thueringen Girozentrale (Helaba) issued benchmark euro deals at record low funding levels on Thursday. The German issuer provided the Bundesbank with its first opportunity to purchase a benchmark domestic deal.

The Bundesbank got its first chance to buy in the primary market on Monday when Landesbank Baden-Wuerttemberg priced a €250m four year Pfandbrief tap. The increase gave a fairly clear indication on the spread level at which public sector demand swamps the private sector and comes amid concern over a bond’s liquidity if the eurosystem’s ownership of a single bond hits its 70% maximum.

Standard & Poor’s said that forthcoming amendments to the Pfandbrief Act are credit positive. BaFin has the right to set overcollateralization levels for individual issues, but the rating agency said on Monday that this will not affect ratings. It does not believe the amendment will now make it easier for voluntary excess collateral to be removed from the cover pool.

Of the national central banks which are buying covered bonds as part of the ECB’s covered bond purchase programme, the Bundesbank has been the most active by a large margin, said two covered bond traders. It is said to have accounted for around a quarter of queries in the secondary market from Monday through to 12pm BST on Wednesday.

Covered bond yields fell on Tuesday as Bunds rallied following a larger than expected fall in the ZEW business sentiment index and lower than expected inflation data. The European Central Bank (ECB) could be poised to commence buying on Wednesday after its scheduled meeting. Since the ECB is likely to be targeting the spread to government bonds, Pfandbriefe are likely to be on the bank’s shopping list, as they look more attractive than peripheral bonds versus their government bonds.

Sparkasse KölnBonn opened books on Tuesday on an Aaa-rated €500m no-grow 10 year mortgage backed Pfandbrief, its first deal since April 2013 and the sixth 10 year print to come out of Germany in 2014. Bankers on the deal said they could have pushed the rare name through mid-swaps but opted not to, as the issuer wanted to leave room for secondary market performance.