Germany

A steady supply of high quality Germany SSA paper continues to give the covered bond market hope it will be next in line to reopen. Raiffeisen Landesbank Steiermark is understood to be preparing for a covered trade in early September, and syndicate officials said high quality names from several jurisdictions are assured market access. In the secondary, however, peripheral covered bonds still lag the debt of their respective sovereigns.

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.

A theoretical 10% or 20% haircut on ECB exchanged Greek government bonds in the public sector cover pools of German banks would have a limited effect on nominal overcollaterlisation (OC). Spanish and Italian pool exposures are much larger and a factor that investors should take into consideration.

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.