Spain

Markets stabilised on Tuesday morning following S&P’s announcement that it may cut sovereign ratings across the eurozone, ending three days of sovereign tightening. Overall the tone remains constructive, according to covered bond traders, with better buying in French and peripheral covered bonds. But with only a couple of weeks of trading to go before year end, and covered bond spreads not following sovereigns tighter, issuers are still most likely to wait for an opportunity in January.

Fitch has downgraded mortgage backed covered bonds issued by three Portuguese banks, highlighting the risk of peripheral covered bonds falling below the rating threshold for ECB repo eligibility. Issuers still shut out of the market are heavily reliant upon repo funding, and further downgrades could force the ECB to adjust its criteria, though DBRS has offered a lifeline to at least one Portuguese bank.

With a €600bn maturity mountain to scale next year, half of which is in the comatose senior unsecured sector and the remainder split between covered bonds and government guaranteed debt, European banks had been hoping to proportionally increase their covered bond funding. But this avenue has also been constricted and alternatives must now be considered. Covered bonds that might have been publicly placed are now being pledged for bilaterally negotiated repo trades and ECB repos. In addition banks are aggressively deleveraging.

ECB purchasing reached €930m on a settlement basis by the end of last week, with traders reporting buying of German, French, and some Spanish paper in the secondary market. The impact of the programme remains limited, however, and there have been calls for the eurosystem central banks to make bonds purchased under the programme available for bilateral repo purposes.

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.