Spain

Bankia bought back a much higher than expected €1.2bn of its covered bonds in a liability management exercise this week, paying a decent premium. Meanwhile Spanish covered bonds are performing strongly, after investors received over €5bn of Cédulas redemptions on Thursday.

CaixaBank launched its first euro benchmark covered bond in over year on Tuesday, pricing a five year transaction well inside the sovereign curve. A limited spread concession relative to its better-rated peers put some investors off, but many more leapt at a deal offering yield and a spread with the potential for performance.

Spanish Cédulas are in demand, following the outperformance of the Bono over the last week. However, this flies in the face of fundamental credit risks, which Moody’s has warned are very high.

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.

Bankia became the latest Spanish issuer to announce a covered bond buyback on Friday, and will take offers on several mortgage backed Cédulas over the next two weeks.

Bankia became the latest Spanish issuer to announce a covered bond buyback on Friday, and will take offers on several mortgage backed Cédulas over the next two weeks.

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.

Changes to Spanish mortgage law will not lead to lower overcollateralisation, as the rules will only apply to new loans, Fitch said on Tuesday, contradicting an earlier statement from Moody’s.

Spanish government bonds performed well on Friday but long term concerns about the outlook for Spain are spooking traders who are increasingly willing to consider leaving illiquid Cédulas shorts uncovered. In core markets, traders are focused on the Bund swap spread and suggested that a potential sell off could be accompanied by a spread tightening.

Plans to amend Spanish mortgage law will hit covered bond investors and could limit credit flow into the country, Moody’s warned on Monday, as they will weaken lender recourse to borrowers, and lower the level of over-collateralisation.

Cédulas have dominated covered bond issuance so far in 2013, aided by a remarkable rally that has seen nine deals printed this week. However, oversubscription rates have dwindled this week, and both core and periphery issuers may need to increase what they offer investors to get their attention in a crowded market.

Banco Santander’s first covered bond for nearly a year, a €2bn five year, surprised the market by hitting the middle part of the curve on Monday. The spread did not change from initial price thoughts to final terms, which showed the plan had been to take a large chunk out of the market, bankers told The Cover.