Terra roadshow only Nordic covered prospect despite benign market

A covered bond roadshow for Norway’s Terra BoligKreditt was the only Nordic FIG primary market-related activity this week despite markets being open, said syndicate bankers, while Nordic covered bond secondary spreads have been stable.

Blackouts ahead of third quarter financial result announcements combined with well advanced funding programmes are keeping issuers away from the euro covered bond market, while changes in the basis swap have made the US dollar market appear less attractive compared with as recently as only two weeks ago, said bankers.

“Results are coming out now, so the market should be opening up,” said one. “A lot of issuers are well funded, so the question is whether to prefund or not, and whether to go for senior unsecured or covered bonds.”

Meanwhile, the secondary market for Nordic covered bonds has been very stable recently, according to Nicolas Poli, global head of covered bond and SSA trading at Crédit Agricole CIB.

“There has been better selling overall,” he said, “as previous safe haven flows are being unwound in line with improved market sentiment towards risky assets, but this has been very well absorbed by the street, with spreads moving sideways to a touch tighter.”

Selling flows have been concentrated in the three to five year part of the curve, according to Poli, with some of the money reinvested in longer maturities. In addition, central banks have been investing fresh money in the long end, which has led to a slight flattening of credit curves.

A covered bond analyst said that Nordic covered bonds have strongly benefited from a flight to quality and, possibly even more importantly, a lack of covered bond supply.

Spreads have outperformed swaps by some margin, he said, with the short end trade now trading well through swaps. Swedish spreads have tightened to a level that does not suggest any further outperformance potential, while strong issuance from Norway at the beginning of 2012 could help explain why spreads are not tighter compared with Swedish covered bonds, he added. He agreed with other market participants who have said that Norwegian covered bond spreads would benefit from any drop in supply that could result from any restriction on issuance on behalf of the regulator.

Danish covered bond spreads have also tightened over the past few months and have performed well, but remain wide compared with other Nordic spreads, according to the analyst.

“The main reason is that investors are still more worried about the state of the housing market in Denmark than those in the other Nordic countries,” he said.