Spain

Prospective buyers of peripheral paper are waiting for imminent Spanish and Italian auctions to indicate market sentiment, said syndicate officials. Meanwhile the covered bond market would benefit from more attention to credit fundamentals, as opposed to an exclusive focus on underlying government bonds, said Morgan Stanley analysts.

Purchases of government debt by the ECB stalled a rise in Spain’s borrowing costs and resulted in its sovereign CDS dropping from over 400bp to 350bp at the end of last week. On Monday morning Spanish and Italian government bonds tightened slightly against Bunds, though Spain’s CDS widened out to 375bp, with market participants concerned over the lack of a long term solution to the sovereign debt crisis.

A steady supply of high quality Germany SSA paper continues to give the covered bond market hope it will be next in line to reopen. Raiffeisen Landesbank Steiermark is understood to be preparing for a covered trade in early September, and syndicate officials said high quality names from several jurisdictions are assured market access. In the secondary, however, peripheral covered bonds still lag the debt of their respective sovereigns.

EFSF guaranteed covered bonds could be one solution to dwindling access to term funding among Europe’s banks. Even if markets reopen in September, costs are likely to be high across asset classes, particularly senior unsecured, said market participants. Funding constraints may lead banks to shrink their balance sheets, and if unchecked could lead to a grinding credit crunch in the southern eurozone.

After a week of severe fluctuations in all market segments, traders said Monday morning was the quietest day in weeks. Market participants are hoping for a modicum of stability to improve the chances of primary supply at the end of the month and several issuers from core jurisdictions are finalising roadshows in order to come to market, syndicate bankers said. But if new issue premiums are at the top end of expectations, they added, it will reshape the secondary curve — and this may deter some names from returning.

A theoretical 10% or 20% haircut on ECB exchanged Greek government bonds in the public sector cover pools of German banks would have a limited effect on nominal overcollaterlisation (OC). Spanish and Italian pool exposures are much larger and a factor that investors should take into consideration.

French covered bonds have widened in the secondary market following concern that the sovereign could lose its triple-A rating. Meanwhile traders reported buying in Spanish and Italian covered bonds as investors move out of government paper.

Government bond yields for Spain and Italy tightened on Monday morning after the European Central Bank’s announcement that it will buy up the countries’ sovereign debt, but moves in covered bonds were more conservative. Bid offer spreads for most peripheral paper remain near the record levels reached last week, said traders.

Core European investors are much more pessimistic than two months ago, according to Crédit Agricole’s latest sentiment index, which showed an even greater decline in issuer sentiment. Investors expect further deterioration in Spanish and Italian covered bonds, but at a slower rate than over the last two months.

Standard & Poor’s on Monday downgraded 46 multi-cédulas totalling €103bn, and removed them from credit watch negative, because deterioration in the creditworthiness of the participating banks has raised credit risk in the transactions.

Moody’s placed Spanish government bonds (Aa2) and the debt and deposit ratings of five Spanish banks on review for downgrade on Friday, because of funding pressure facing the Spanish government, and challenges to fiscal consolidation. Though the covered bonds of the banks concerned are likely to be unaffected in the short term, the negative rating action is worrying for weaker Spanish issuers.

Peripheral sovereign bonds are once again heading towards their recent widest spread levels but covered bonds, as usual, are lagging the move. Real money buying of peripheral covered bonds has been at levels 60bp through the government in some cases. Volumes are small, however, and bid offer spreads are wide as concerns around volatility continue to weigh in on sentiment.