Italy

The larger than expected quantitative easing programme announced by the European Central Bank on Thursday has turbo-charged the well-established bull flattening trend in covered bonds and trading volumes have tripled from earlier in the week. With the long end of French market now offering a tempting spread to OATs, real money buyers are set to return. And with Bonos and BTPs rallying hard, relative value between covered bonds and sovereigns should soon be restored in the Cédulas and Obbligazioni Bancarie Garantite markets.

Moody’s upgraded 12 Italian and Spanish covered bonds into “Aa” territory after the close on Wednesday, taking the bonds from category 2A to 1B in the liquidity coverage ratio (LCR). Though this should theoretically improve bank demand, last week’s LCR impact study published by the European Banking Authority (EBA) showed most banks had already met their minimum LCR requirement, suggesting scope for an improvement in appetite will be limited.

Covered bond issuers from outside the Eurozone launched deals this week denominated in sterling and Australian dollars. But a bigger proportion were from the Eurozone where borrowers launched deals in the single currency in maturities that ranged from four to 20 years. The transaction were priced generously and enjoyed a solid reception, with central banks taking a back seat.

The European covered bond market kept up its momentum on Tuesday as four euro-denominated deals hit the screens and books were opened on another denominated in Australian dollars. The euro deals all offered a new issue concession of around 5bp and were comfortably oversubscribed.

The European covered bond market got off to an exceptionally strong start on Monday as LBBW, Compagnie de Financement Foncier (CFF) and BBVA launched euro benchmarks across a range of maturities, without a hiccough. The strong start bodes well for Tuesday when several more euro benchmarks including Bank of Ireland and BPER are due.

Mediobanca and UniCredit could see their covered bonds drop to A- after Standard & Poor’s downgraded the Italian government by one notch to BBB-.

This week the ECB scaled back buying in the primary covered bond market and gave the private sector a chance to set the price.

After a string of lacklustre covered bonds, the primary market found its mojo on Wednesday as Cassa di Risparmio di Parma e Piacenza (Cariparma) issued a larger and longer Obbligazioni Bancarie Garantite than its closest comparable. Despite a weak secondary market, the issuer was able to attract a book that was driven by private sector demand for its first public deal, because pricing was fair and was defined from the start of the bookbuild.

Cassa di Risparmio di Parma e Piacenza (Cariparma) has mandated leads for its inaugural Obbligazioni Bancarie Garantite, which is set to launch tomorrow following the roadshow which was finalised on Monday.

With a pall of misery hanging over the covered bond market, Cariparma’s debut covered bond, which could be launched next week, could be the final primary issue of the year.

UniCredit Italy has revitalised hopes for the conditional pass through (CPT) covered bond structure which was pioneered by NIBC over a year ago and was at risk of being ignored. The programme lowers asset encumbrance, improves access to funding and can be used to fund a broader range of mortgage assets with full preferential regulatory treatment. It should send a strong signal to other issuers across Europe, but especially those in Spain where an overhaul of the legal framework is on the table.

The European Central Bank's covered bond purchase programme (CBPP3) turned relative value upside down this week, with a French deal pricing inside a similar Swedish offering, among a crop of four new issues.