Spain

The ECB's Long Term Refinancing Operation could increase the bid for covered bonds through its restorative effect on the senior unsecured market.

Bank of New Zealand returned to the market on Monday with a long three year benchmark, after postponing a five year trade earlier this month. The change of maturity and capped deal size yielded a far more positive result, with over 100 accounts contributing to the most oversubscribed order book of the year.

The secondary market in covered bonds is in danger of breaking, and though it is not there yet, there are concerns over ‘forced delivery squeezes’ in the repo market which may lead to failed trades. Though it has always been the intention of the European Central Bank to improve liquidity, there are some who now say that it is not doing enough. Covered bonds could risk becoming almost like a private placement market if the current situation persists.

With many French and Scandinavian issuers in blackout, the European covered bond pipeline is light on potential candidates for primary supply. Dwindling issuance is forcing investors to look at the secondary market for paper and has contributed to some spread tightening, particularly for Spanish Cédulas, making the prospect of a publicly sold deal from a Spanish national champion not quite so far fetched.

As eurozone issuers slip into blackout, Australian, Nordic and Canadian names have taken over primary market supply. Westpac is planning trades in euros and Australian dollars, while Sparebank 1 Boligkreditt began taking indications of interest on a seven year trade this Monday morning.

A sizeable new euro bid for UK RMBS emerged this week as Santander UK’s £2.2bn-equivalent Holmes 2012-1 provided the sector’s first issue of the year. The deal raised funding at levels considerably tighter than where it could have issued in covered bonds.

The non-eurozone, no-euro theme in the covered bond market continued on Thursday with the announcement of two debut currency benchmarks, one of which was priced. After the successes of Barclays and Nationwide, National Australia Bank issued its first sterling dea, Lloyds mandated for another sterling deal and UBS is set to bring its first dollar deal.

Covered bond spreads have survived sweeping sovereign downgrades by Standard & Poor’s on Friday. Only French issuer Dexia was reported wider on Monday morning, while the LTRO cash injection has ensured short dated Spanish and French paper remains highly sought after.

The strong Italian and Spanish government debt auction results on Thursday have helped government bond yields tumble, which is good news for issuers. But with cheap financing from the ECB still on offer and covered bond spreads still wide to the government market, primary issuance prospects remain dim.

An official at a Spanish national champion tells The Cover how he expects to fulfil next year’s funding requirement and how his plan compares with this year’s funding. He thinks covered bonds will remain in the liquidity coverage ratio and believes they may even be lifted to level one. Though the RMBS market has not made a comeback, he thinks that it might. Given the more stable secondary performance versus covered bonds, there is a case for it being included in the LCR which could help the market return.

Australia’s big four banks will look to make euro covered bond debuts early in 2012 after two underwhelming forays into the dollar market in November and a privately placed Norwegian krone transaction in early December.

The ECB’s unprecedented refinancing operation may hit covered bond supply at the short-end of the curve, but medium and long-term issuance — the mainstay of the covered bond market — could benefit from greater confidence in banks’ health, bankers told The Cover.