Covered Bond & RMBS Comment – Negative yield no issue for investors

by: Joost Beaumont

  • Strong demand for negative yielding 4y deal of Berlin Hyp
  • This likely reflected that the deal was still attractive versus the sovereign…
  • …while a lack of supply at the short end of the curve probably also helped
  • Eika Boligkreditt prints 7y deal, balancing net supply from Norway
  • Wuestenrot Bausparkasse to sell debut EUR 250mn 8y deal
  • OMA Savings bank from Finland to hit the road for first sub-benchmark
  • CBPP3 purchases slowed down last week
  • Dutch house prices rose at fastest pace in 16 years

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-22-November.pdf (221 KB)

Strong demand for negative yielding 4y mortgage Pfandbrief of Berlin Hyp.

Investors seem to have no problems with euro benchmark covered bonds that are issued at a negative yield. Berlin Hyp drew strong demand for this year’s first covered bond that was issued at a negative yield. The issuers was in the market yesterday with a 4y mortgage Pfandbrief, which was issued with a zero coupon, while being priced above par. At issue, the yield was -0.108%.

However, the book size was almost EUR 2bn, roughly four times the deal size. This is among the highest bid-to-cover ratios we have seen this year. Demand is likely to have been supported by the pickup versus the German sovereign, while a lack of issuance at the short-end of the curve probably also helped. Overall, the deal breaks open the option to sell more deals at the short end of the curve with a negative yield, a territory that so far had not been entered this year.


Eika Boligkreditt sold long 7y benchmark

Eika Bologkreditt was in the market with a long 7y deal, which was the issuer’s second deal of 2017 and the country’s 9th. This bond actually attracted less demand than the 4y BHH, with a book size of EUR 0.9bn. This was despite the fact that it offered a pickup of around 10bps versus core names. This could be an early sign of some investor fatigue for Norwegian covered bonds of which EUR 8bn have been issued so far this year. Having said that, net supply of Norwegian covered bonds is roughly in balance now.

Wuestenrot Bausparkasse to sell 8y sub-benchmark

Today, Wuestenrot Bausparkasse will be in the market with its first EUR 250mn 8y sub-benchmark mortgage Pfandbriefe (rated AAA). It will follow in the footsteps of Sparkasse Hannover, which issued a10y sub-benchmark at ms -10bp a week ago. Currently, most benchmark Pfandbriefe with a 8y maturity are trading at ms –mid/high 10s.

OMA Savings bank to hit the road for debut deal

Finnish OMA Savings Bank announced yesterday that it will hold a roadshow next week in order to market an inaugural sub-benchmark covered bond with an intermediate maturity. The bond will be rated AAA at S&P, while the cover pool includes Finnish residential mortgages. The bank has a balance sheet of some EUR 2bn and has recently setup a EUR 1.5bn programme (see here) from which it can sell senior unsecured as well as covered bonds.

Slowdown in CBPP3 purchases

The weekly CBPP3 numbers showed that the Eurosystem slowed down its purchases of covered bonds last week. In total, it bought EUR 352mn on a net basis, while roughly EUR 300mn of reinvestments brought the overall total to EUR 0.6bn. The total size of CBPP3 now stands at EUR 237.8bn.

The slowdown followed a week where the central had stepped up purchases, so it is likely that it should be largely related to weekly volatility. Looking forward, we expect that the central bank will not change the volume of covered bond purchases materially, as we expect that the EUR 30bn reduction in net purchases from January will be mainly focussed on government bonds and agency debt (i.e. the PSPP). The reason being that the central bank is reaching its limits regarding the PSPP, while covered bond purchases have already declined during the programme, limiting the room to reduce them further. Therefore, we expect that the Eurosystem will continue to buy around EUR 3-4bn of covered bonds on net basis going forward.

Dutch house prices rise at fastest pace in 16 years

Dutch house prices increased by 8.2% in October compared to a year ago. This was a pickup compared to the 7.3% rise in September and has kept the annual growth rate above the 7% for eight months now. What is more, the increase was the strongest since the start of 2002. Overall, house prices are still 4% below the peak reached in August 2008, but they have now risen by 22% since the trough in June 2013. Furthermore, there are regional differences, as prices are already above pre-crisis levels in most urban areas. We expect that a shortage of the supply of homes for sale will keep upward pressure on prices, as housing demand is likely to remain strong on the back of low mortgage interest rates as well as improving economic conditions.

Other news

* Moody’s has upgraded the rating of the class B notes of Dutch RMBS transactions DMPL 11 and DMPL 12. The rating of the class B notes of DMPL 11 were raised to A2 from Baa3, while that of DMPL 12 was raised to A3 from Baa3. The rating agency confirmed the AAA ratings of the class A notes of both transactions. A better than expected performance of the collateral was mentioned as main reason for the upgrade.

* Fitch affirmed the AAA rating of the covered bonds of Canadian Imperial Bank of Commerce. The rating buffer is four notches.


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