UK

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.

Activity has once again shifted into dollars, with European investors paralysed by a lack of detail on the upcoming ECB covered bond purchase programme and a resolution of the sovereign debt crisis. Meanwhile Canadian banks issue dollar deals with ease, and Australia’s big four could be swayed into taking the same route for their respective debuts, said syndicate officials.

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.

Speculation that Lloyds would join HSBC and Barclays to issue a covered bond benchmark in US dollars has faded. The allure of RMBS is taking precedence as funding considerations add to other structural advantages. Lloyds, which had been rumoured with a dollar covered bond deal earlier this year, has therefore decided to go for an RMBS.

Despite a widening yield spread between France and Germany, French covered bonds continue to perform well, bolstered by support from domestic investors. French issuers, prescient of their 2012 funding needs and the risk to their country’s top rating, could be tempted to return to the markets with a benchmark before the end of the month.

Coventry Building Society got the covered bond market off to strong start on Monday morning launching its first euro trade amid a general upturn in sentiment. Core Europe is also showing signs of life, with UniCredit Bank Austria mandating for a public sector backed transaction.

Guidance on Nationwide’s Silverstone RMBS is identical to where Santander UK placed Holmes 2011-3 three weeks ago, reflecting Silverstone’s status as a top tier issuer in the UK market, as well as sluggish spread movement in the wider senior RMBS market.

Nationwide had the audacity to announce, open and price a jumbo deal hours before Thursday’s potentially market moving announcements from the ECB and Bank of England. But its boldness was rewarded as the issuer printed €1.5bn instead of the targeted €1bn, showing the market what could be achieved with the right name, even in the narrowest of windows.

Nationwide’s decision to brave the waters with a €1.5bn five year clearly paid off, with the €2.4bn book sending a strong signal to other borrowers to take advantage of the funding window.

The prospect of another ECB covered bond purchase programme (CBPP) has kept issuers and investors in risk off mode all week, but Nationwide bucked this trend on Thursday and took the market by surprise with a €1.5bn five year deal. The offering is the first €1bn-plus, euro covered bond in more than a month and it stands in stark contrast to last week’s sub-jumbo deals — all on a day that few picked out as a window.

Covered bond market participants are firmly focused on Thursday, when the ECB could announce another round of covered bond buying. Regardless of market conditions, a deal on Monday was always going to be unlikely because of German holidays. But the weak market opening has made a deal between now and the ECB meeting more tricky — particularly for the smaller names that dominate the pipeline. Covered bond traders reported a very quiet morning, with customers unwilling to take a position before Thursday.

Moody’s and Fitch have downgraded the senior rating of Clydesdale Bank. Though the borrower’s triple A covered bond rating remains intact, the cuts are unhelpful in the context of a recent mandate and a roadshow of its newly established covered bond programme.