Germany

UBS and Eurohypo tapped the short end of the curve on Thursday, leaving long dated supply to UniCredit. Swedbank issued a five year dollar benchmark. Meanwhile the pipeline continues to build, with HSBC, Nordea Bank Finland, and Deutsche Pfandbriefbank announcing roadshows ahead of planned transactions.

Prospective buyers of peripheral paper are waiting for imminent Spanish and Italian auctions to indicate market sentiment, said syndicate officials. Meanwhile the covered bond market would benefit from more attention to credit fundamentals, as opposed to an exclusive focus on underlying government bonds, said Morgan Stanley analysts.

Covered bond traders and syndicates warned against premature optimism during the relative calm at the start of this week, and it turns out those warnings were apt. But syndicate officials have not given up hope of issuance in the next few weeks even though the possible candidates to reopen the market are down to a select few from Germany, the Nordics and the Netherlands — and those with credit lines to US investors are now even better placed.

The pipeline for issuance continued to build on Thursday, with Austrian, Nordic, and French borrowers scheduling investor meetings ahead of planned transactions. Though all prospective trades are in euros, syndicate officials said it could be a dollar trade that reopens the market.

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.