Germany

Markets stabilised on Tuesday morning following S&P’s announcement that it may cut sovereign ratings across the eurozone, ending three days of sovereign tightening. Overall the tone remains constructive, according to covered bond traders, with better buying in French and peripheral covered bonds. But with only a couple of weeks of trading to go before year end, and covered bond spreads not following sovereigns tighter, issuers are still most likely to wait for an opportunity in January.

Commerzbank will head a number of German banks issuing structured covered bonds next year, market conditions permitting, as momentum gathers in the product’s development.

The German Association of Pfandbrief Banks (VDP) is set to launch its secondary market transparency initiative in the new year. It has been piloting the scheme for two months, securing daily price quotes for jumbo Pfandrbriefe from market makers at 12 banks.

Secondary market activity has slowed considerably as banks wind down their balance sheets ahead of the year end. Market making is still happening but flows are skewed to the bid side, with bids so low that few investors are prepared to deal on them.

Caisse de Refinancement de l'Habitat on Wednesday morning presented the ECB with only its second opportunity to make a primary purchase under the central bank's second covered bond purchase programme. Following in the footsteps of Crédit Mutuel Arkéa — the only other issuer to have done a deal qualifying for support in the primary market — CRH launched an extension of an outstanding 10 year trade at the widest level for French paper this year.

ECB purchasing reached €930m on a settlement basis by the end of last week, with traders reporting buying of German, French, and some Spanish paper in the secondary market. The impact of the programme remains limited, however, and there have been calls for the eurosystem central banks to make bonds purchased under the programme available for bilateral repo purposes.

Covered bond participants are anxiously looking to developments in the wider market in the hope that a resolution to the sovereign impasse is found. But, in the event nothing is agreed, contingency plans are now being made. Some syndicate bankers are hoping that the EU summit meeting in Brussels on December 9 will yield progress. Tap issuance is possible, but with the market as it is some bank holders believe there is more sense in remaining short some bonds.

Despite hopes that the result of Spain’s general election would bolster sagging equities and pull in widening government bond yields, market conditions appear prohibitive at the start of a potentially shortened week.

The mortgage backed Pfandbriefe of four German Landesbanks are at risk of losing their triple-A ratings, after Moody’s lowered the senior unsecured ratings of the issuers by up to three notches on Wednesday.

European covered bond markets continue to look in poor shape as the macro sovereign backdrop dramatically deteriorates. This suggests that Commonwealth Bank of Australia’s euro denominated benchmark is likely to remain on hold for the time being. But that should not delay Westpac, which is planning to open books on Thursday afternoon.

The euro covered bond market has begun to show signs of life, a full five trading days after the formal start of the ECB purchase programme. Crédit Mutuel Arkéa will price a rare dual tranche tap later on Wednesday.

While Westpac and Commonwealth Bank of Australia headed to the US on Monday to market debut covered bonds, ANZ has started meeting investors in Europe, after finishing a US roadshow last week.