Nordics

With a sizeable portfolio of variable rate mortgages, it makes sense for Stadshypotek to issue floating rate covered bonds, as this minimises interest rate risk and swap costs. Though the investor base for floating format covered bonds is still in its infancy, treatment of the asset class in bank liquidity buffers could soon be improved, and since FRNs are better suited for bank liquidity books, this is a market that could potentially deliver a substantial stream of demand.

Swedbank looks set to price the tightest non-German euro seven year benchmark covered bond in over five years, and with a negligible new issue premium. The transaction’s success drew on a confluence of positive factors.

Covered bonds rated AA- or higher will be elevated to a Level 1 asset in Liquidity Coverage Ratio (LCR) according to an internal document being circulated at the European Commission. This backs up a press release from the Danish government last Friday. The improved structural bid is most likely to affect bonds lower rated bonds previously ineligible for the LCR, said analysts.

The Norwegian Ministry of Finance on Tuesday defined what it considers a systemically important financial institutions, and said they should hold 2% more common equity tier 1 (CET1) than other Norwegian banks.

A new draft recommendation from the European Commission (EC) that appeared on the Danish government’s website on Friday says covered bonds which meet certain criteria can be considered extremely liquid assets and can fulfil up to 70% of bank liquidity buffers with a 7% haircut.

The Swedish Financial Supervisory Authority (FI) announced on Thursday that it will introduce higher capital requirements for four major Swedish banks. It also intends to activate a countercyclical capital buffer and has said it will increase the risk weight of mortgages from 15% to 25%, in line with the Riskbank’s recommendation last year.

The European Commission (EC) could be ready to lift the amount of covered bonds that can be used to fill Liquidity Coverage Ratio (LCR) requirements from a maximum of 40%, to a new higher limit of 60%, according to head of the Danish Mortgage Bankers Federation. The outcome could be known within a few days.

Credit sentiment is positive, and it seems unlikely that the European Central Bank would take anything other than an accommodative stance at next week’s policy meeting, but bankers are getting cautious that valuations are becoming overstretched, particularly in those markets which have until now been considered safe havens.

The Swedish Bankers Association has published a letter to the Basel Committee on Banking Supervision which says that the Net Stable Funding Ratio (NSFR) would cause banks to rely less on covered bond funding, and more on alternative sources which are not as stable.

On Monday, Aktia Bank launched and priced its second euro covered bond benchmark. Despite some investor concerns over Finland’s relationship with Russia that were encountered during the investor roadshow, the deal exceeded the issuer’s pricing and distribution expectations.

The new Danish covered bond law, which comes into effect on April 1, is a more complicated structure where a maturity extension is possible under limited circumstances. Because the new bonds carry a higher risk compared to the existing legacy bonds, issuers looking to sell bonds face increased execution risk. The Cover spoke to various buy and sell-side market participants to gauge their thoughts.

Covered bonds are finishing the week tighter with demand spurred after Bunds softened, allowing investors to hit absolute yield targets. Traders reported investors looking to extend maturities, though selective sales of long-dated Norwegian bonds have raised speculation of primary activity next week. Core to peripheral convergence is still broadly evident especially in Ireland, but signs of fatigue have become evident in long dated multi-Cédulas and selective short-dated single name Cédulas.