European and the UK covered bond markets are well supported in euros, with the cut in the ECB’s refinancing and deposit rates incentivising investors to hunt for yield. The short end of the curve steepened after the rate cuts and there was further follow-through buying interest on Monday.
“The cut in the ECB deposit rate should lower the incentive to park money at the ECB and thus push lower the rate on alternate short dated investments, including front end core and semi core bonds,” said Deutsche Bank research in a report on Monday.
Buying momentum has been particularly conspicuous in the higher yielding one year maturities where names like BBVA offer a coupon of 4.2% and on multi Cédulas deals where yields can exceed 7%. But generally peripheral covered bonds are weaker on an asset swap basis — though they are outperforming their local government bond markets.
There was small buying of Santander March 2015s recently at asset swaps 390bp, which is 85bp through the Bono. And in the five year, Santander is trading 120bp through the Bono. There has also been a small amount of interest in the BBVA 16s, which are bid 73bp through Bonos. But the main action has been in core markets.
“On Friday we saw decent German buyers of ING and ABN 2014s and French bonds are bid only through to the 2015 area,” a dealer in Frankfurt said on Monday. Since the rate cuts, Dutch covered bonds have tightened up to 2bp and Nordic covered bonds are up to 3bp tighter with interest noted in SBAB, DNB Nor and Sparebank.
One dealer in London agreed with this pattern, adding that the strong bid was compounded by a lack of supply. “Dealers are booking tighter spreads with very little turnover. It is very hard to find offers, yet there are a lot of people sitting on cash trying to invest — which is creating a squeeze.” Of all markets, the French and UK covered bonds had performed best, he said.
But he found it incredible, bordering on the ridiculous, that a central bank had been buying Dutch covered bonds. “It is absolutely nonsensical given the aim of the covered bond purchase programme,” he said.
As a result of all this interest in core markets, the covered bond curve has steepened. The periphery market curves are generally flattening, however.
In the German two year there were buyers in Berlin Hyp, Postbank — and Deutsche Pfandbriefbank. Deutsche Pfandbriefbank is one of few Pfandbriefe still offering a positive spread versus mid-swaps, now at plus 8bp/1bp, which is around 3bp tighter since Wednesday’s close.
At the opposite end of the German credit spectrum lies Helaba whose April 2016s were last indicated at 11 to 12bp through mid swaps. Bankers noted that, following news of last week’s merger, West LB’s two outstanding (2015 and 2016) covered bonds have tightened 5bp or more.
“These bonds still have a lot of potential to tighten, particularly since they are difficult to source,” the Frankfurt dealer said, pointing out that the spread differential between Helaba and WestLB is still around 40bp, even though they are now the same credit.
French strength
French covered bonds have produced one of the strongest recent performances, with spreads tightening between 5bp-8bp since the ECB rate cut in names like Compagnie de Financement Foncier (CFF), BNP Paribas and BPCE.
There has been interest in five and 10 year benchmarks, though the lack of long end inventory has meant that activity has been skewed to the medium and short maturities, one dealer in Paris said.
The two big outliers on the French covered bond market are DexMa and 3CIF. DexMa 2016s were indicated at 180/170bp, from around 200bp as little as two weeks ago, and the seven to 10 year area of 3CIF was seen indicated in the 150bp area.
“DexMa is still 100bp cheap to CFF and wide to its peers so there’s probably still some catch up to be done,” the London based dealer noted.
UK names are well bid, owing in part to the lack of supply. The last euro UK benchmark was a €2bn five year deal from Barclays which was priced on February 15. Of those European jurisdictions that can still access the market, the UK has been the longest not to issue a euro covered bond.
Dealers reported buying of UK euro issuance from UK and German accounts. Aside from scarcity, another big driver of interest is the outperformance of the sterling three year floating rate sector. “Sterling floaters look very expensive versus euros,” the Frankfurt dealer said.
Nationwide’s 2015 floating rate notes are 10bp tighter than the same offer in euros. “All UK names are sticky on offered, except for Abbey which has been tainted a little by Santander following the downgrade,” the same dealer noted.
Fitch affirmed the triple-A ratings of Abbey National Treasury Services covered bonds based on the issuer’s single-A rating. Though overcollateralisation stands at a hefty 43%, an issuer rating below BBB+ would result in the covered bond rating falling below triple-A, according to Fitch.
Dealers felt that the onset of summer illiquidity would begin to emerge after about two weeks.
“The window is closing soon, we have this week and next week and then summer will kick in. I’m sure one or other issuer will try to bring a deal, but from what I understand the pipeline is pretty light,” the Parisian dealer said.