Covered supply explodes with ECB QE, Greek vote looming

Fourteen new euro benchmarks since Monday made this one of the busiest ever weeks in covered bonds, while issuance in the senior unsecured market was similarly brisk, as financial institutions took advantage of buoyant market conditions to raise funding.

After just one benchmark euro covered bond last week, activity took off on Monday, with CFF, BBVA and LBBW hitting the market with 10, seven and five year deals, respectively. The momentum was maintained through to Thursday, with each day seeing three or four transactions.

Thursday witnessed the longest, largest and widest issues of the new year’s supply, as Caffil sold a Eu500m 20 year benchmark, Bank of Montreal a Eu1.5bn five year, and Cajamar a Eu750m seven year at 90bp over mid-swaps.

Seven years has been the favoured maturity, with a Eu1bn issue for KBC on Thursday taking the number of issues in the segment to seven. The Belgian bank’s transaction was also noted as having achieved a relatively aggressive level, with a modest new issue premium of around 3bp versus new issue premiums this week tending towards 5bp — which overall had marked an increase on those in late 2014 when CBPP3 compressed premiums towards zero.

“It seems that the bigger new issue premiums we have been seeing are water under the bridge now,” said a syndicate official. “It is clear evidence that there is still far too much money around and people are desperate to put this money to work.”

Another banker said that, in contrast to the last deals of 2014 when some order books were barely subscribed, oversubscription levels are healthy, even with Eurosystem participation being more limited and without orders being inflated.

“That instils confidence in me and I think the market, too,” he said.

Buying under the European Central Bank’s third covered bond purchase programme has been more restrained, according to syndicate bankers, with orders and allocations both at the lower end of sizes and percentages witnessed since the programme was launched. Bankers also noted that CBPP3 orders had come in later in the execution process and could now be price sensitive.

Secondary market spreads were holding up in the face of the heavy covered bond supply. Some weakness was cited in the senior unsecured market on Thursday, with spreads on a few new issues having widened, but that did not stop successful new primary market supply, with Berlin Hyp and Crédit Mutuel Arkea, for example, pricing new fixed rate deals.

Bankers expect dealflow to remain brisk at the beginning of next week, but warned that it could slow down later in the week, with an announcement on sovereign QE expected after an ECB governing council meeting on Thursday (22 January) and Greek elections on Sunday of next week.

“The market is still there, but as we get closer to the ECB next week and then the Greek elections I think we’ll see an increase in volatility, so things might start shutting down into Wednesday,” said Robert Chambers, FIG syndicate manager at Crédit Agricole CIB. “But in the meantime, the opportunity is there and I expect issuers to try to come to market ahead of those events.”

The prospect of sovereign QE was seen as having risen even higher this week following two events: a European Court of Justice ruling on the ECB’s Outright Monetary Transactions programme that did not throw up any obstacles; and the dramatic scrapping of a cap on the value of the Swiss franc versus the euro by the Swiss National Bank. The latter was interpreted as being driven partly by the perceived inevitability of Eurozone sovereign QE.

However, some market participants noted that, with expectations having been raised, there is a risk of disappointment at Thursday’s ECB meeting. Reports last week that the ECB was studying a Eu500bn programme had nevertheless already moderated size estimates, while other observers have argued that there will be a lack of hard details on Thursday — which would be in line with the ECB’s moves on its covered bond purchase programmes.

Amid the potential excitement and issuance, Nordic supply is nevertheless expected to remain subdued, with most of the region’s major banks now having entered blackout periods. The first to exit upon announcement of fourth quarter results will be Sweden’s Nordea, on 28 January.

In the meantime, in covered bonds Commerzbank has mandated a seven year mortgage Pfandbrief to Commerzbank, Crédit Agricole CIB, DZ Bank, Mediobanca and Natixis, which is expected early next week, as is a benchmark from National Bank of Canada is expected via BNP Paribas, Commerzbank, HSBC, NBC and RBS after having held a European roadshow this week. HSH Nordbank is also planning a new issue after a roadshow, having mandated Barclays, Deutsche, HSH, JP Morgan and Natixis.