Italy

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.

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.

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.

An Italian covered bond investor talks to The Cover about the sovereign market malaise and his position on covered bonds. The increasingly desperate situation shows little sign of relenting, he says, while activity is mostly focused on relative value versus the senior market.

Peripheral sovereign bonds are once again heading towards their recent widest spread levels but covered bonds, as usual, are lagging the move. Real money buying of peripheral covered bonds has been at levels 60bp through the government in some cases. Volumes are small, however, and bid offer spreads are wide as concerns around volatility continue to weigh in on sentiment.

After digesting the details of a rescue plan for Greece, traders have marked back Spanish and Italian sovereign debt following a brief relief rally on Friday. Secondary market activity was subdued on Monday, and though covered bond spreads have lagged sovereign tightening, making them look relatively cheap, traders said it was never enough to be market moving.

Europe’s politicians agreed on a second rescue package for Greece on Thursday, providing markets with much needed succour. However, covered bond practitioners said this does not mean the market is suddenly in risk-on mode. Investors and issuers, they said, will want to see extended stability in spreads before putting in large bids or printing new paper.

Canadian Imperial Bank of Commerce found a window for issuance amid market volatility on Thursday, launching its third Australian dollar deal of the year. In a difficult week for all asset classes, market participants said the A$600m three and a half year benchmark showed covered bonds are living up to their billing as a genuinely global product.

A UK based credit investor, who has participated in many of this year’s benchmark covered bond deals, talks to The Cover about the current dilemma facing Europe. He believes that throwing more money at the problem, such as through further EFSF buying, will only provide a temporary solution. Ultimately, there needs to be clear evidence that Europe’s high indebted countries are lowering their deficits. There is every chance that this will take place over the next nine months or so. Both Italy and Spain have made progress and should continue to do so, but the Spanish government is probably in the stronger position. His hopes for Greece remain dim.

Covered bond practitioners say the release of Capital Requirements Directives IV is positive for the sector and broadly similar in outlook to the draft version of Basel III that sealed a structural bank bid for the sector. There have been changes in the way covered bonds are treated by the Liquidity Coverage Ratio, and potentially in the way the Net Stable Funding Ratio is applied. Underlying market sentiment remains negative, as many believe that the sovereign debt crisis is only just beginning.

Though a revision of the Capital Requirements Directives (CRDIV) released today will likely be positive for covered bonds, traders and syndicate bankers are not convinced of any lasting effect on market sentiment. On the contrary, the sovereign debt crisis, they said, can only get worse.