Germany

Market indices rallied on Thursday, following the EU’s unveiling of its Grand Plan to remedy the eurozone’s woes. BPCE was quick to capitalise on the upturn, securing nearly four times oversubscription for a minimum €200m tap of its 10 year. Bank Austria also moved swiftly on the positive mood and is taking IOIs for possible pricing this afternoon or Friday. Bank of Montreal showed the strength of US demand on Wednesday, when it attracted $3.75bn of demand for its $2bn three year deal. But the floodgates are unlikely to open fully ahead of November 3 when the ECB will announce details of its purchase programme.

German issuers with US dollar assets in their cover pools may start looking at the US 144A market early next year, following the German Association of Pfandbrief Banks (vdp) first US roadshow in three years.

Stress in bank funding markets, exposure to troubled eurozone sovereign bond markets and moves away from implicit government support have affected the creditworthiness of many global banks. But Standard & Poor’s approach to covered bond ratings means they should remain resilient compared to other agencies.

Any benchmark covered bond deals are unlikely to happen before Wednesday when EU leaders unveil their eurozone rescue plan. The lack of any detail emerging from the EU summit has also kept investors sidelined in the secondary market, with traders reporting very limited flows for core and peripheral paper.

The official announcement on Thursday of a joint venture between Caisse des Depots and La Banque Postale, which have both taken stakes in Dexia Municipal Agency, is credit positive for the issuing entity’s Obligations Foncières and should help maintain their triple-A ratings, bankers said.

European borrowers backed off from issuance on Wednesday after French government bond spreads reached 16-year wides versus Germany. UniCredit Bank Austria had hoped to bring a deal after investor meetings in Helsinki and Copenhagen on Tuesday, but leads unanimously agreed that market conditions were not suitable and they will wait to see the result of weekend headlines following the EU summit.

The underlying tone to the primary and secondary covered bond markets remains broadly supportive. Though the wider credit market is clearly still dealing with considerable uncertainty, for the right name and spread, investor demand is there — as evidenced last week with deals from Hypo Noe and CRH. The time could therefore be ripe for more French, Austrian or German names to step in. But whether the market is ready for the rumoured BBVA deal remains to be seen.

Austria’s Hypo Noe Gruppe Bank negotiated worsening market conditions on Thursday afternoon to price a no-grow €500m three year Pfandbrief, the second public sector deal in that tenor out of the jurisdiction in two weeks.

The Italian Department of Treasury is considering introducing a new instrument, separate from OBGs and securitisation, that would allow banks to use a wider range of assets for funding. Though only in a discussion phase, the move may see Italian issuers join their French and German counterparts in using structured covered bonds to alleviate funding pressure.

Secondary activity in the covered bond market is picking up, with a slew of deals and merger activity spiking interest. DexMA is performing but Dexia Kommunalbank is rudderless. Banco Pastor has tightened and Caixa Catalunya has seen some interest. Tier one French names are also enjoying better selling. More generally, stronger ECB rate cut expectations mean the short end is well supported.

ssuers will need to pick their timing carefully this week given German holidays on Monday, along with an Ecofin meeting in Luxembourg, a decision on another round of covered bond buying to be taken at Thursday’s ECB policy meeting and US non-farm payrolls on Friday.

Covered bond market participants are firmly focused on Thursday, when the ECB could announce another round of covered bond buying. Regardless of market conditions, a deal on Monday was always going to be unlikely because of German holidays. But the weak market opening has made a deal between now and the ECB meeting more tricky — particularly for the smaller names that dominate the pipeline. Covered bond traders reported a very quiet morning, with customers unwilling to take a position before Thursday.