- Nervousness to dictate markets…
- …keeping the primary market closed
- Sentiment in the secondary market less negative
- Covered bonds getting cheaper versus government bonds…
- …a trend we expect to continue
DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.Covered-Bond-RMBS-Comment-10-February.pdf (225 KB)
The primary covered bond market was effectively closed for another day yesterday, as the sell-off in equity markets continued. Banks continued to be the main culprit. This makes its very unlikely that we will see any pickup in primary market activity in covered bonds any time before markets have entered calmer waters. Today, Fed Chair Yellen will speak the US House Financial Services Committee, which might help to restore some calm.
Secondary market more stable
Sentiment in the secondary covered bond market was less negative. The Eurosystem was again in the market, buying roughly the same paper as it did the day before yesterday. So it bought 7y and 10y German paper and 7y Spanish names. Meanwhile, we saw buyers of French covered bonds in the 7y tenor. Spreads remained roughly stable overall.
Euro area covered bonds have continued to cheapen versus their sovereign, but this was mainly due to sovereigns outperforming swaps rather than covered bonds underperforming. The asw-spread differential between Dutch covered bonds and the Dutch sovereign has for instance risen to around 26bps in the 7y maturity. Looking forward, we still think that covered bonds will cheapen further, as we expect the Eurosystem to step up its asset purchases, mainly focussing on sovereigns and SSAs.
* Fitch affirmed the AA rating of Caffil. The rating buffer is five notches.