Oceania

Sovereign bond market volatility continued to buffet markets on Thursday and, after the slew of FIG issuance in the last week, there was a degree of supply indigestion. But covered bond bankers did not think there was much to be read into the lacklustre execution of this week’s German and Australian deals. The two issues were solid trades, but for idiosyncratic reasons lacked the sparkle of earlier deals.

National Australia Bank opened books on Wednesday for its first euro benchmark of the year, deciding to follow the well-worn route of others with a seven year tenor, the eighteenth such maturity this year and the fifth this month. Though NAB took advantage of being alone in the market, underlying credit sentiment remains jittery.

Westpac has priced the first dollar-denominated benchmark covered bond of 2014. Though the cross-currency basis swap is unfavourable, the dearth of dollar issuance has caused spreads to tighten and the cost of funding was close to what it could have achieved in euros. The strong result is likely to have piqued interest in the market among Canadian and other Australian issuers.

Resimac and RedZed extended non-bank lenders’ second quarter dominance of the Australian RMBS market this week, but a big four bank is prepping a deal and ING Bank Australia is also set to embark on a global roadshow.

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.

Westpac has issued its first euro denominated covered bond deal of the year and the second from an Australian issuer. The transaction was modestly oversubscribed as bank treasuries were absent due to the fact the bond is ineligible for bank liquidity buffers and for being repo’d with the European Central Bank.

Commonwealth Bank of Australia added to the trend for sterling floating rate covered bonds on Friday, issuing a £350m four year deal. It followed the recent three year sterling deals from Lloyds Bank and Abbey. Given, CBA’s lack of repo eligibility with the Bank of England, a smaller issue was expected. Meanwhile, Deutsche Hypothekenbank also issued a floater, bringing a €250m two year Pfandbrief.

Initial price thoughts are a useful price discovery tool in illiquid markets. But in core markets where liquidity is high, they can obfuscate how successful a deal has been. It is time to consider doing away with them where possible.

Thursday’s suite of covered bond issues from Australia and Switzerland underscored a growing impression among bankers that pricing core transactions is taking more forethought and effort. Whereas deals were invariably easy to price last year, demand seems to have become more finite. Books are taking longer to build as investors need more cajoling to meet issuers’ funding targets, in stark contrast to peripheral credits.

Four issuers from Finland, France, Australia and the UK are set to price covered bonds on Tuesday and Wednesday. Market conditions are broadly constructive, especially for higher yielding names, said bankers, but core issuers might have to offer concessions to tempt investors in a busy start to the year.

National Australia Bank raised $1.25bn of long five year funding at 47bp on Thursday. However, it did not attract the same demand as Westpac, which priced a $1.5bn deal at 46bp on Monday. Despite its wider spread, NAB priced tighter than Westpac, adjusting for the curve.

Commerzbank has returned for its fourth covered bond deal of the year, and the second off its new mortgage platform. It announced the €500m no grow deal on Monday, ahead of Abbey National Treasury Services launching its own deal (see other story).