Covered Bond & RMBS Comment – Four day drought

by: Joost Beaumont

  • Primary market dry for four working days now
  • FOMC, reporting period, and stress tests limiting supply
  • Buyers dominant in secondary market – pressure on spreads to continue
  • Redemptions do not change picture of slowdown in CBPP3
  • Rabobank offloads more mortgages from balance sheet

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Waiting for a deal

The primary covered bond market is still waiting for the first deal this week, and has now been dry for four working days now. It remains to be seen whether any issuer will come to the market this week, as a large number of banks still need to report their figures, while other might prefer to wait after the release of the stress test results on Friday (please see a detailed note about tis here). Furthermore, today the FOMC will meet, but it is likely to keep policy unchanged. Our economists noted that recent communication suggests the Fed is in wait-and-see mode and that they expect the FOMC to signal this remains the case in the July statement. Overall, we think that the Fed will remain on hold until early 2017.

Buyers continue to dominate

Buyers continued to dominate in the secondary market, but trading flows remained light. We saw buyers of UK covered bonds with a 3y tenor, while there was demand for French covered bonds across the curve. Spreads remained stable to slightly tighter during the day. Looking forward, we expect negative net supply and CBPP3 to continue to put downward pressure on spreads.

CBPP3 redemptions not altering picture

Yesterday’s redemption data from the ECB showed that EUR 0.4bn of covered bonds matured last week, implying that the Eurosystem’s bought EUR 0.9bn of covered bonds on a gross basis last week. This did not really alter the picture that was painted on Monday when the QE data was released, which showed that covered bond purchases were one of the lowest amounts of this year. Indeed, the central bank’s secondary purchases dropped to around EUR 127mn on average per day, some EUR 100mn less than during the week before last.

Rabobank offloads more mortgages

Rabobank reported that it had continued to offload mortgages from its balance sheet. It sold EUR 500mn of mortgages to Delta Lloyd, further reducing its mortgage exposure after sold EUR 340mn of mortgages to BinckBank last week, and some EUR 1bn to Dutch insurer VIVAT at the end of March. It also sold all tranches of Dutch RMBS Purple Storm at the start of this month with the same objective. These transactions fit the bank’s policy to reduce its Dutch mortgage exposure, strengthening its capital position.

Other news:

* Fitch affirmed the AAA rating of the covered bonds issued out of capital centre I of Danske Bank. The rating buffer is two notches.