Back-up in Bund yields erases gains, stymies euro covered bonds

The euro covered bond market will need a couple of days of stability in the broader markets before new issues are considered, according to syndicate bankers, while a leading investor said the back-up in Bund yields this week is the worst he has seen and could mark a turning point rather than a mere correction.

Bankers said the market seemed to be in better shape today (Friday), noting that 10 year Bund yields were roughly unchanged, at around 0.60%, having hit highs of 0.80% yesterday before falling again. However, no new euro benchmark covered bonds were issued this week and the lull in primary market activity is expected to continue next week.
“Today things look quiet,” said one. “The Bund sell-off hasn’t continued and hopefully the market is consolidating. The market will need a couple of days off.
“Covered bonds have been resilient, but investors need to see more stability and issuers have to be aware of this,” he added. “I wouldn’t expect any issuance until Tuesday at least.”
The most recent benchmark euro covered bond issue was a Eu1bn seven year from Bank of Ireland on 29 April that was only marginally oversubscribed as bookbuilding was negatively affected at the start of the volatility.
The only euro covered bond benchmark trade this week was a Eu150m tap on Wednesday of a Caffil Eu500m 20 year deal that was initially sold on 15 January.
The only new covered bond benchmark was a $1bn five year Eurodollar from Swedbank on Wednesday (see separate article), which led bankers to speculate that more issuers might consider launching deals in currencies away from euros if the volatility continues.
Noting that equities were up 0.5% across most of Europe, one banker was optimistic that euro primary market activity would resume if the improvement is sustained.
“There’s no reason we can’t move forward with primary activity if things clear up,” he said.
Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB, said that covered bond issuers would be advised to consider the long end of the market.
“We are convinced that investors will receive covered bond supply very well since the outright yield has doubled” he said. “We just need the volatility to calm down a bit to execute a trade.
“Issuers will not miss any opportunity to fund before Greece spoils the party again. But execution risks are higher – since spreads remain very low – and investors are very sensitive to price given the ongoing volatility, so prudence is advised.”
Andreas Denger, senior portfolio manager and covered bond analyst, at MEAG, adopted a cautious stance when discussing the volatility at an ICMA Covered Bond Investor Council and The Covered Bond Report conference in Frankfurt yesterday (Thursday).
“At first it looked like a small correction,” he said. “Now, I don’t know – it could be a turning point. I think it was the biggest move I have ever seen on the bond market. It really makes you think.
“Every time there has been some support coming in it can be wiped very quickly and all of the performance you made this year is now wiped away – we are back at Christmas levels, more or less. So sometimes you need to ask yourself, even if you think there might be the floor in terms of the correction, will I go negative with my performance or will I try to save the last basis point I have for my account, and just sell everything and be short or neutral – and this can of course spur another sell-off in the market.”