Sweden

Sweden’s financial regulators are concerned at how much encumbrance is on banks’ balance sheets. The country’s borrowers are among the most encumbered in Europe, and despite efforts to increase deposits new covered legislation could make the situation worse.

With peripheral concern resurgent, covered bond investors are looking for safety. But having grown tired of exceptionally tight core levels they are also in search of spread. Nordic issuers are best placed to offer them both and should be taking advantage of the primary while they can, said syndicate bankers.

Stadshypotek pushed the dollar covered bond curve out to seven years this week, pricing the longest covered bond benchmark in the currency since 2007.

Sweden’s Stadshypotek priced a A$750m inaugural transaction on Friday, paying only a small premium over where it would have funded in the domestic market.

Sweden’s Stadshypotek on Thursday became only the fourth issuer to launch a benchmark Kangaroo covered bond. Despite an explosion of domestic supply this year the global appetite for Australian dollars remains strong, which bodes well for other Nordic issuers looking at inaugural trades.

Sampo Housing Loan Bank on Wednesday mandated for the sixth seven year covered bond benchmark of September, and should price the trade on Thursday. Despite a renewed appetite for risk in the wider market, covered bond supply remains consigned to safer names, but a successful auction for the Spanish sovereign could pave the way for further Cédulas.

Deutsche Bank brought the covered bond market to the brink of sub-Euribor pricing on Friday, issuing a €750m eight year mortgage Pfandbrief just a single basis point above mid-swaps. With the secondary squeeze grinding onwards syndicate bankers said it was only a matter of time until the Euribor barrier was broken.

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.

Sparebank 1 Boligkreditt on Monday returned to the euro market for the first time since January. The rare borrower priced a five 1/2 year benchmark many times cheaper than where it sold a longer trade at the start of the year, exemplifying the sustained tightening in core covered spreads.

The covered bond market is gearing up to restart next week, said syndicate bankers, who expect at least two benchmark trades to hit the screens. German and Scandinavian borrowers are tipped as the most likely candidates to take advantage of squeezed secondary levels. But with no end to spread contraction in sight, the urge to wait and watch levels grind tighter could cause some borrowers to hold off.

Secondary covered bonds spreads are grinding tighter as buyers faced with negative yields in the sovereign market drive short dated covered yields towards zero. While core jurisdictions wallow in a sea of demand, investors are still averse to peripheral paper, but the wide spread gap could cause Spanish and Italian spreads to bounce back, said bankers.

Sweden’s regulator wants to alter how issuers value cover pool assets and introduce regular collateral stress tests.