Germany

Following the US downgrade, the dollar market for triple-A rated bonds has been reduced from around $15,000bn to $136bn, closing the market to dedicated triple A buyers. Covered bonds should benefit, but with up to 40% likely to be downgraded within a year, buyers will need to be selective.

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.

The most recent amendments to the Pfandbrief Act provided greater clarification on the legal status of administrators of cover pools following issuer insolvency, but the potential for the ECB to deny repo funding remains, according to latest Deutsche Bank research.

Eurohypo released its first half results on Tuesday, reporting big public finance burdens caused by the Greek debt crisis, but a positive forecast on its commercial real estate business.

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.

With its 10 year benchmark covered bond still sidelined by market conditions, Bayerische Landesbank on Tuesday tested investor appetite for something totally different: €250m of 18 month floating rate covered notes.

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.

The drip feed of staff leaving Landesbank Baden Württemberg’s investment banking team continued this week. Denis Rath will join a protracted list of former LBBW employees that have joined rival firms. After working for five years on LBBW’s French and German covered bond and supra agencies syndicate desk, he is to join Commerzbank, where he is expected to work in senior unsecured debt syndication.

Europe’s politicians agreed on a second rescue package for Greece on Thursday, providing markets with much needed succour. However, covered bond practitioners said this does not mean the market is suddenly in risk-on mode. Investors and issuers, they said, will want to see extended stability in spreads before putting in large bids or printing new paper.

Deutsche Pfandbriefbank (pbb) intends to return to the covered bond market in H2 with its first benchmark deal since January 2010. The European Commission on Wednesday approved state aid provided to Hypo Real Estate Group (HRE), of which pbb is a subsidiary, from the Federal Republic of Germany. In a presentation, HRE clarified pbb’s EC approved business model, which will focus on Pfandbrief eligible business in Germany and other European countries.

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.