Spain

Covered bond participants are anxiously looking to developments in the wider market in the hope that a resolution to the sovereign impasse is found. But, in the event nothing is agreed, contingency plans are now being made. Some syndicate bankers are hoping that the EU summit meeting in Brussels on December 9 will yield progress. Tap issuance is possible, but with the market as it is some bank holders believe there is more sense in remaining short some bonds.

As primary supply remains elusive, focus is shifting towards the New Year and the question of whether issuance will resume when the market restarts in January. Syndicate bankers were reluctant to suggest either a solid reopening, or continuing malaise.

Despite hopes that the result of Spain’s general election would bolster sagging equities and pull in widening government bond yields, market conditions appear prohibitive at the start of a potentially shortened week.

The euro covered bond market has begun to show signs of life, a full five trading days after the formal start of the ECB purchase programme. Crédit Mutuel Arkéa will price a rare dual tranche tap later on Wednesday.

The covered bond market waited in vain on Tuesday for the start of ECB purchase programme (CBPP.2) buying in the secondary market. Despite moderate sovereign tightening, peripheral covered bond spreads continued to trade well inside government bonds, particularly in Italy where it is increasingly doubtful that issuers will be able to bring benchmark deals against outstanding curves.

News of the ECB’s latest covered bond purchase programme has failed to move secondary spreads, analysts and syndicate officials told The Cover on Monday. Meanwhile the situation in peripheral jurisdictions continues to deteriorate, making the programme’s success all the more contingent upon concrete political resolution in the individual countries, and Europe as a whole.

Activity in the secondary market has been focussed on France where several banks report Street and real money interest – even as the French government bond spread to Germany hit new spread wides. Meanwhile, syndicate officials cast doubt on whether the ECB’s purchase programme will materially benefit Italy and Spain.

Euro jumbo issuance since August fell by a third compared with last year, but a look at the redemption calendar for this quarter and the first quarter of 2012 shows that funding pressures will not wait for Europe to fix itself. The ECB purchase programme may help some borrowers plug funding holes, but with only €40bn at its disposal, not all issuers will be able to rely on the ECB to refinance assets.

A major covered bond investor talks to The Cover about the ECB’s purchase programme and what could follow. He does not think it will adopt a needs-based approach and suspects that a prospective spread tightening will be short-lived.

Peripheral covered bonds tightened against government debt on Monday, undoing sovereign outperformance following last Thursday’s rally. Bid offer spreads continued to widen across the board as participants remain cautious ahead of purchase programme details.

The covered bond market remains on hold while it waits for news from the EU summit, the ECB meeting and details of the covered bond purchase programme. Despite continuing systemic doubts, bankers believe the market is open for the right name at the right spread. But even if a solution is unveiled, underlying issues driving the sovereign crisis are expected to resurface — unless the ECB’s mandate is changed.

Secondary activity in the covered bond market is picking up, with a slew of deals and merger activity spiking interest. DexMA is performing but Dexia Kommunalbank is rudderless. Banco Pastor has tightened and Caixa Catalunya has seen some interest. Tier one French names are also enjoying better selling. More generally, stronger ECB rate cut expectations mean the short end is well supported.