Italy

Core and peripheral borrowers are waiting for a better market before bringing benchmark covered bonds. Safe-haven names are traditionally first to take advantage of returning stability. But southern European borrowers, which offer higher yields, juicers spreads and are less flexible over pricing, will find execution easier, said bankers.

Trading in Spanish and Italian covered bonds was relatively stable against asset swaps on Monday, while they tightened versus their domestic sovereign bonds, following the news that Cyprus faces a bail-out from the European Union.

Italian covered bonds have traded steadily following Fitch’s downgrade of Italy late last week. Despite the sovereign downgrade, Fitch affirmed the AAA rating for the Pfandbriefe of UniCredit’s German subsidiary on Monday.

The secondary covered bond market was busy on Monday, with dealers reporting large trades in multi-Cédulas, which have held steady, and better buying of Italian covered bonds, which are tightening.

Crédit Agricole braved an uncertain market on Thursday to launch its first Obligations à l’Habitat of the year. It was rewarded for its courage with the largest covered bond print in over a month and a final spread inside its secondary curve, proving the primary window remains wide open for core issuance.

Deutsche Pfandbriefbank tapped a recent floating rate mortgage backed covered bond for €150m on Wednesday, although fresh benchmark deals are unlikely in the wake of Italy’s election, said debt bankers. They fear the surge in volatility could close the issuance window for weeks. However, other bankers countered that strong core names would have no trouble bringing transactions.

Covered bond bankers are still hoping for deals this week, despite uncertainties over the quality of order books in recent deals. Meanwhile, the market is waiting for the Italian election results and watching for any delayed reaction to the UK’s rating downgrade.

A multi OBG deal from Italy’s state owned public financing institution Cassa Depositi e Prestiti now looks unlikely, bankers told The Cover on Friday. CDP is expected to decide by the end of this month whether and how to proceed with plans to funnel long term funding to Italy’s smaller banks, which are currently locked out of the markets. A multi issuer Obbligazioni Bancarie Garantite had been touted in the market this week, but industry officials on Friday said this was the least likely option, given the costs involved.

Wednesday’s sterling deal from Bayerische Landesbank came as welcome relief to supply starved investors but the paucity of supply has also been particularly marked in the euro market, where issuance volumes are half of last year’s shrunken levels. The technical mismatch is helping to spur demand in the secondary market where Spanish deals are once again in vogue.

The ABS and covered bond worlds have come closer together after Fitch had to explain its rating methodology for Commerzbank's SME structured covered bond programme. The rating agency will apply covered bond criteria to the pioneering programme, even though the bonds will have ABS like features. The news follows an upgrade of Banca delle Marche’s covered bonds after they were cross-fertilised with structured finance technology.

UniCredit put on a demonstration of the New Year’s appetite for risk on Monday morning when it priced a €1bn seven year covered bond from a €6.5bn book. Demand for the deal has been granular with the pricing, at 150bp over mid-swaps, being 90bp through the government curve.

Italy’s covered bond market will tread water in 2013 in terms of outstanding bonds, say analysts. Issuers remain at the mercy of their sovereign story and a tricky general election is due in the first quarter, but supply could surge if the outlook improves.