CSI 14th edition: Investor sentiment holding up remarkably well

Apr 11th, 2013

What the last few weeks have lacked in terms of issuance, they certainly made up for in terms of news flow, which probably led to elevated blood pressure and increased heart rate amongst many.

Looking at our CSI, while overall investor sentiment could weather the storm surprisingly well (CSI investor index actually moved up from 4.2 to 4.7), the issuer side became increasingly nervous (CSI issuers dropped from 7.9 to 6.6).

Looking at the country breakdown of our CSI issuer index, it was not just issuers from the periphery who became more pessimistic; some core continental European issuers came back to us with scores in the 3-5 points range.

The area that has been and still is the most stable is the Nordic region. Issuers from up north did experience a fall in their current assessment from 8.2 to 7.1, but with this number they still have the highest score and the fall was the smallest of any region. The ability to tap various currency markets is probably one of the main drivers here. While there was no activity in primary markets in euros and Cyprus related was volatility at its peak, Swedbank as well as DNB successfully issued five year US dollar benchmark covered bonds.

The drop in issuer sentiment is for us the main reason why we have not seen much in terms of euro covered bond issuance in recent weeks. Many issuers are fairly well funded and see no reason why they should price one of their very few, if not their only, benchmarks for the year in an environment that is not ideal. The ability to wait for perfectly calm waters before jumping in probably also explains why they are more sensitive to negative news at the moment.

Investors, as can be seen from the CSI numbers above, are for once more laid-back and would very likely be pretty receptive to deals from a wide range of countries (more on geographic preferences below). So, a lack of investor demand is certainly not the explanation for the low primary market volumes at this point.

Our trading desk has in recent days continued to nudge spreads of core sectors tighter and tighter. We are not talking about massive spread moves, obviously, as we are already at very tight levels, but swap spread widening in recent days and further compression between countries such as France and Germany in the sovereign space have pushed covered-govvie spreads in core sectors slightly wider as well as making Nordic covered bonds slightly more attractive. The fact that there is turnover at these levels shows the strength of investor demand and how the lack of issuance just keeps compressing markets.


CSI investors: holding steady in the face of Cyprus

As mentioned above, investor sentiment was remarkably stable in this edition, actually going up from 4.2 to 4.7. Despite the more volatile backdrop and problems in peripheral sovereign and senior markets, even sentiment towards Italian and Spanish covered bonds has continued to move up (and not just amongst domestic investors). Investors seem to have basically shrugged off the threat of contagion from Cyprus or the threat of deposit runs in peripheral countries that was being discussed for a few days during the Cyprus bank bail-out discussions.

Core sector sentiment did rise a touch faster (by 0.7 to 4.8 in the current assessment vs. an increase of 0.3 to 4.7 for peripheral markets), lifting it back slightly above sentiment towards peripheral markets, but we are talking about tiny differences here and most certainly not about a massive shift in positioning back to exclusively core paper on behalf of investors.

The only real impact events surrounding Cyprus have had was to delink Italy/Spain from Ireland/Portugal again somewhat, after they had converged to almost the same level in February. Sentiment towards Ireland/Portugal dropped slightly from 4.4 to 4.1 in the current assessment and 4.7 to 4.4 in the expectations score.

When looking at the individual investor bases and their preferences, we want to highlight a few interesting points:

  • Slightly higher domestic focus in the core space – Sentiment towards domestic core European as well as Nordic sectors has been going up a little more strongly than for other sectors in this edition (+0.7, which compares to an increase of only 0.2 for Italian/Spanish covered bonds). We would not want to talk about a retrenching to home markets, though, and don’t think that we will see as much of a Nordic covered bond focus compared with what we had at the height of the volatility mid-way through last year before Draghi made his “whatever it takes” speech. After all, sentiment toward Italy/Spain also went up. However, for core European investors we would say that the above-mentioned swap spread and associated covered bond–govvie spread widening has made their domestic sectors a bit more interesting again, which is reflected in sentiment scores, and the same thing holds true for Nordic covered bonds in that context.
  • Nordic investors step on the brake again – Nordic investors have always been the most conservative out there, but this April they have cemented their status in that context once more. While Nordic investors were the only regional investor base with a significant drop in sentiment towards southern Europe, their sentiment towards Nordic covered bonds has jumped from 5.4 to 7.3. Sentiment-wise, issuers from the Nordic region have been able to rely on their domestic bunch and the main reason why this doesn’t show in euro benchmark covered bond distribution statistics for Nordics is that most of the guys up north usually focus on their local currency covered bond markets rather than the euro market.


Bottom line of this month’s edition…

The main takeaway from our April CSI edition for us is the remarkable stability in investor sentiment. Wider swap spreads are helping covered bonds from core sectors and the Nordics with their home crowd, while the only real impact from the latest nervousness in many markets has been a slight re-decoupling of sentiment towards Italy/Spain on the one hand (still going up) and Ireland/Portugal on the other hand (dropping slightly).

Issuer sentiment has been the negative element that has dragged the overall CSI score down from 6.2 to 5.5. It is understandable to some extent that, if issuers do not have large funding programmes ahead of them for 2013, they do not want to enter the market with one of their few if not only transactions of the year unless the situation is picture-perfect. Relatively speaking, Nordic issuers were the most stable, but sentiment did come down as well somewhat.

Looking at the reaction of investors to the recent volatility and talking to our covered bond traders, who continue to see flows even at these tight spread levels, it is definitely not the investor side that is responsible for the low issuance volumes so far this year. Demand is there for a wide range of markets and issuers despite the developments of recent weeks. All that is needed are issuers willing to dip their toes into the water. HSBC France, BNP Paribas and Munich Hypo are proof to this.

Given current temperatures in the Nordics (London isn’t much better, by the way), we can most certainly understand the reluctance to go swimming. However, things are supposed to warm up temperature-wise in the coming days, so maybe there is a chance…


Florian Eichert

Senior covered bond analyst

Crédit Agricole CIB

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