Covered Bond & RMBS Comment – Solid appetite for new flavours

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.

  • New green and conditional pass-through met with solid demand…
  • …showing investors are still happy to add covered bonds to portfolios
  • Mediobanca in market with 12y deal, extending curve by four years
  • Deal flow to continue given pre-crisis low spreads and investors still there
  • Lively trading day, with demand for Canadians picking up
  • Dutch housing transaction rose by 16% in September
  • Home sales to lose momentum due to supply shortage…
  • …which will continue to exert upward pressure on house prices
Covered-Bond-RMBS-Comment-17-November.pdf (107 KB)

Two new flavours receive warm welcome

Yesterday, two new flavours were added to the euro benchmark covered bond market. Both deals received a warm welcome, showing still solid investor appetite. Deutsche Hypothekenbank issued its first green mortgage Pfandbrief (ABN AMRO involved in the deal), following in the footsteps of Berlin Hyp. Deutsch Hypo set guidance of its 6y deal at ms -12bps, but printed the deal in the end at ms -14bps, providing a new issue premium of around 3bps. Investor appetite was solid, as the book size was reported at EUR 0.9bn, which was in line with demand for the green Pfandbrief of Berlin Hyp in June.

Meanwhile, Achmea Bank made a successful return to the covered bond market with a 7y conditional pass-through (CPT) benchmark. It followed Aegon Bank, which sold a 7y CPT at ms -6bps benchmark earlier in the week. Achmea Bank set guidance at ms -2bps, but eventually sold the deal at the same level of Aegon. This still offered a 2bp pickup versus a 7y CPT deal of NN Bank, while it offered a pickup of around 13bp versus the larger Dutch soft bullet issuers. Versus the Dutch sovereign, the pickup was more than 30bps.

Demand for Achmea’s deal was EUR 1bn, which was slightly below the book size of the Aegon deal, but still robust. Indeed, the deal showed ongoing solid investor interest for Dutch CPT covered bonds.

Mediobanca in market with 12y deal

Mediobanca is currently in the market, selling a 12y deal (rated AA). This will extend the issuer’s curve by some four years. The bank’s longest outstanding bond is the BACRED 1 ⅜ 11/10/25, which is trading at ms +26bps. Best comparable is probably the CARPP 1 ⅝ 03/21/29, which was issued at ms +65bps in March but now trades at around ms +19bps. Overall, Cariparma seems to trade at tighter levels than Mediobanca. Therefore, we see fair value at around ms +mid-high 20s.

The cover pool consist of Italian residential mortgages, which have a WA indexed LTV of 53% and WA seasoning of 74 months. Nominal OC was 30% at the end of September.

Low spreads to support deal flow

Looking forward, we expect that the flow of new deals will continue next week. Spreads are at pre-crisis lows, while investors are still there. This might induce some banks to come to market to already prefund for next year. Having said that, we do not expect market conditions to change any time soon.


It was a lively day in the secondary market. We saw investors taking profit in some Nordic names, while Canadian paper was well bid in the belly of the curve, supported by a continued widening of swap spreads. Meanwhile, peripherals were also well bid, with the Eurosystem being the biggest buyer in this very thin market. French covered bonds are reaching levels of ms – low 10s in the 10y spectrum, which has continued to perform recently.

Dutch housing transactions

Dutch housing transactions rose by 16.2% in October compared to a year ago. This marks a strong pickup after three consecutive months during which the annual growth rates slowed down (and even was negative in Septmber). So far, this year, 239K homes have been sold, a 15% increase compared to the same period last year. What is more, home sales are on track to hit a new record high this year, supported by strengthening economic conditions as well as historically low mortgage interest rates. Looking forward, we expect housing transactions to lose momentum on the back of a shortage in the supply of homes for sale. This, in turn, will continue to exert upward pressure in house prices (for which data will be released next week).

Other recent publications:

Covered Bond Watch – Achmea returns with conditional pass-through
Short Insight – The ECB’s QE reinvestments revisited
Green Bond Monthly – Financials lead green charge
Financials Watch – Foundations arise for a new bank funding mix
Covered Bond Watch – No tapering of covered bonds
Financials Watch – European bank issuance outlook for 2018