Germany

Borrowers from peripheral and core jurisdictions priced over Eu6bn worth of benchmark covered bonds across three currencies this week, which included inaugural deals from Italian and New Zealand issuers. Prospects for supply next week are similarly diverse, though volatility and European holidays may narrow the window for issuance.

Aareal on Tuesday priced its second Eu500m deal of this year, opting for a five year maturity. Buyer interest was not as forthcoming as for previous Aareal trades, but the final allocation was more diverse and with a larger proportion of non-German investors. This could be an indication that Aareal, as with other small core names, knows its usual lines are nearing exhaustion and the bank has no choice but to diversify its funding base.

Dealers report a strong bid in covered bonds this Wednesday morning, though some selling in the five to 10 year segment was welcomed as it helped cover shorts. Dexia Municipal Agency remains under pressure and with Bonos tightening, cédulas have underperformed, triggering some selling.

Germany’s Aareal Bank kicked off covered issuance this week with a triple-A Pfandbrief on Tuesday, while UniCredit mandated banks for a seven year OBG which was launched the same day.

Crédit Agricole on Wednesday completed a Eu1.5bn seven year transaction, its third covered bond this year and its first under the new Obligations a l’Habitat framework. Despite French issuance topping Eu50bn so far in 2011, there are no signs yet of French credit lines being exhausted.

UniCredit’s German entity, HVB, on Tuesday issued its first benchmark Pfandbrief since January. The Eu1bn five year deal benefitted from an enduring safe haven bid and investors’ confidence that, despite its headquarters in a peripheral European country, it remains a German name with the advantages that status bestows.

German issuers, conspicuous by their absence from last week’s core paper jamboree, are back with a bang this week, after Deutsche Kreditbank, owned by Bayerische Landesbank, and UniCredit — came to market on Monday and Tuesday respectively. Domestic buyers did not let the banks down, putting in a solid bid.

The covered bond primary market exploded into life on Tuesday with new developments on as many as eight deals — of which four or even five, are expected to price during the day. The constructive primary market is largely due to an improvement in underlying market sentiment.

Though the covered market was quiet on Friday, market participants can look back on highly successful week in which almost Eu7bn in euro benchmarks was issued. After faltering supply in April UniCredit analysts report that covered bonds are on track for another record month. Issuance thus far in May is almost Eu20bn, less than Eu2bn short of the record total supply for that month.

On Thursday, Nordea took advantage of the flight to quality bid, scarcity of short end Scandinavian supply and sizeable bank treasury and central bank interest to launch and price a Eu2bn three year covered bond backed by Finnish prime residential mortgages. Timing and choice of lead played an important role in attracting top quality Asian demand.

Dexia Kommunalbank braved a difficult market on Monday to print a Eu1bn 2.75% May 2014 issue. Though not quite as well received as Dexia Municipal Agency’s Obligations Foncières two weeks ago, the benchmark public sector Pfandbrief was priced in line with guidance and enjoyed strong participation from domestic investors.

Ratings agencies and covered bond analysts have still not reached a consensus over the most efficient way to mitigate against refinancing risk following a segregation event.