Covered Bond & RMBS Comment – Private sector QE programmes to remain sizeable

by: Joost Beaumont

  • Quiet end to week, with EUR 1bn raised of euro benchmark deals this week
  • But short-end of the curve broken open for issuers
  • Issuance to continue next week – still EUR 7bn of redemptions left this year
  • ECB hints at no real scaling down of CBPP3…
  • …this underlines our view that CBPP3 will not change materially
  • Portugal outperforming, probably as it is the cheapest in the periphery

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Covered-Bond-RMBS-Comment-24-November.pdf (209 KB)

A quiet end to the week

The primary market of euro benchmark covered bonds has ended the week quietly, with no activity yesterday, something that is unlikely to change today. This week only two issuers issued euro benchmarking deals, raising a total of EUR 1bn, taking year-to-date issuance to EUR 106bn. This compares to EUR 111bn of redemptions, resulting in negative net supply of EUR 5bn. However, one of this week’s deals (the BHH 0 11/29/21) broke open the market at the short-end of the curve, as investor demand was very strong for the first benchmark that was issued at a negative yield this year. This could induce other issuers to issue at the shorter end of the curve as well. Overall, we expect some more issuance in coming few weeks before the market closes for year-end. In any case, around EUR 7bn of covered bond benchmarks will redeem before year-end.

TSB Bank to start roadshow for inaugural 5y benchmark GBP floater

TSB Bank has just announced that it will hit the road next week for a debut 5y benchmark GBP-denominated floating rate covered bond. The bond will have a Aaa rating at Moody’s.

No scaling down of CBPP3

The ECB published the account of the Governing Council’s 25-26 October meeting, when it decided to extend its QE programme, but at a slower monthly pace of purchases, while leaving the programme open ended. Our economists wrote that the media headlines were focussed on the more hawkish statements, despite the fact that these statements reflected a minority view in the Council given that the account notes they were held by a ‘few’ members. Indeed, the account notes that ‘a large majority of members supported the proposal …(for)… an extension of the net asset purchases, at a monthly pace of €30 billion, for nine months until the end of September 2018, or beyond, if necessary; unchanged forward guidance on policy rates and on the APP’. Therefore we do think that the Council was split or in two minds. We do think it is likely that the programme will end in September 2018, but a tapering period will likely follow, which could last until 2019Q1. Furthermore, we do not expect the first rate hike until the second half of 2019.

One final element in the account worth a mention is confirmation that the central bank noted that ‘the three private sector purchase programmes would remain sizeable and the private sector programmes would not be adjusted in strict proportion to the overall scaling-down of the APP’. This strengthens our view that we will probably see no material change to the covered bond purchase programme, with the central bank continuing buying around EUR 3-4bn per month on a net basis.

Portugal outperforming

The Thanksgiving holiday in some countries limited trading flows. We still saw buyers of German Pfandbriefe across the curve, while there were also buyers of Dutch names at the long end of the curve. Nordic names were in demand at the short end, although there were selling of Nordic names as well. During the week, spreads seem to have tightened slightly further. Portuguese covered bonds have outperformed so far according to Bloomberg data, which is probably due to the fact that they trade at the widest level of peripheral names.

Other news

* SBanken Boligkreditt has setup a EUR 5bn covered bond programme to enter European capital markets. It expects to issue the first euro benchmark during the first half of next year.


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