Covered Bond & RMBS Comment – Records broken in busiest week since months

by: Joost Beaumont

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.

  • Last week, EUR 4.25bn of euro benchmark covered bonds were issued
  • This made it the busiest week since five months
  • Meanwhile, many deals were printed at record tight spread levels
  • Mediobanca extended its curve by four years without premium on Friday
  • Low spreads and still robust investor demand should attract more supply
  • Italy outperformed in the secondary market where iBoxx reached new low
Covered-Bond-RMBS-Comment-20-November.pdf (64 KB)

Last week was busiest since months

Last week’s activity in the primary market for euro benchmark covered bonds was the busiest in five months if looked at the volume of new issuance (EUR 4.25bn). Moreover, it was the busiest week since the start of the year in terms of the number of issuers that came to the market (seven). Furthermore, investor appetite remained healthy, reflected by solid bid-to-cover ratios. This was despite the fact that many issuers printed their deals at record low spread level.

Mediobanco extends curve without premium

On Friday, Italian bank Mediobanca sold a 12y benchmark, which extended the issuer’s curve by almost four years. The deal went very smoothly, especially given the headlines regarding Banca Carige. In the end, the bank was able to sell the deal basically flat to its own curve, while demand was reported at EUR 1.7bn. This shows in our view that many investors are hungry for yield, while issuance of Italian covered bonds has remained relatively limited as well.

Deutsche Hypo sold most of first green deal to banks and German investors

Deutsche Hypothekenbank sold its first EUR 500mn green mortgage Pfandbrief mainly to banks, which were allocated 53% of the deal. Meanwhile, central banks received 22%, asset managers 17% and insurers 6%. The breakdown by geography showed that German investors bought 72%, 15% went to the Nordics, 4% to the Benelux and 2% to Austria/Switzerland, France, the UK, and Asia/Middle East each.

More deals expected

Low spreads and last week’s strong demand for all kinds of new deals are likely to attract more issuers to the market. Issuers might not be in a hurry though, as the window to the market will probably be open for another four weeks.

Spreads held up well in secondary market

Last week, spreads of the iBoxx euro benchmark covered bond index reached another post-crisis low, although the decline in spreads was very small. Interesting to note is that Italian spreads continued to outperform, followed by France and Spain. Spreads of core covered bonds remained roughly stable, while non-CBPP3 paper showed mixed results, with New Zealand, Canada, and Denmark slightly underperforming.

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