Spain

After a six month absence Banco Sabadell returned to the covered bond market on Tuesday with a two year cédulas. Though it looks like the borrower will successfully raise its target €500m in line with guidance, bankers on the deal warned that the depth of demand for peripheral paper had become too thin to realistically consider another deal until after Wednesday’s German court ruling on the legality of the European Stability Mechanism.

Three European borrowers mandated covered bond deals on Monday, taking advantage of what could end up being only a brief funding window in the wake of the European Central Bank’s announcement last week that it would support peripheral sovereign debt markets.

Moody’s cut Santander Totta’s covered bonds in line with the Portuguese sovereign’s new rating ceiling, which caps all the country’s covered bonds one notch above junk.

Covered bond issuance is on hold while the European Central Bank’s meeting in Frankfurt commands all attention. ECB president Mario Draghi is expected to provide details of a sovereign bond purchase programme and peripheral sovereign spreads have already tightened in expectation. But analysts said investors fearing a disappointing programme could switch to into covered bonds — with Cédulas the most likely to benefit from such a shift.

This week’s two covered bond deals have helped increased activity in secondary markets, traders told The Cover. There has been selling pressure in the senior unsecured but this has only translated to more mixed flow in covered bonds.

Covered bond issuers proved reluctant to follow ING’s lead and launch trades on Tuesday, as activity shifted to the senior market. But given the strong reception for secured issuance syndicate bankers remain confident of supply later in the week.

Intesa Sanpaolo was the most likely candidate to follow UniCredit’s groundbreaking €750m reopener, but could face an even higher spread, investors told The Cover on Wednesday. Italy also represents the only hope for peripheral supply in the short term, as Spain remains priced out of the primary.

UniCredit has rewritten the rulebook this week by pricing a covered bond 100bp tighter than where the Republic of Italy can fund itself. But, other than Intesa Sanpaolo, it is unlikely any other issuer could follow suit.

UniCredit drew a stellar reception for the first Italian benchmark in almost a year on Tuesday, with the vote of confidence for peripheral risk raising hopes for follow on trades from Italian and Spanish names.

Covered bonds are more stable, higher yielding and offer better protection than sovereign paper, according to Barclays analysts. But liquidity and security also drive investment decisions, and negative government bond yields show how much the market values both, an investor told The Cover.

An asset manager in Frankfurt tells The Cover about breaking the link between covered bonds and their respective sovereigns, investing in peripheral markets, and the problem with regulatory favouritism.

Not so long ago, it was commonly accepted that bank resolution regimes would hobble senior unsecured issuance. Unlike holders of fully protected covered bonds, which cannot be bailed in, senior noteholders faced the threat of haircuts in the event of bank insolvencies.