Covered Bond & RMBS Comment – Challenges ahead for Eurosystem

by: Joost Beaumont

  • Cariparma and OMA Savings Bank get warm welcome…
  • …with spread of 8y Cariparma 38bps tighter than its 8y deal in March
  • Overall, market is still receptive for new deals
  • Some profit taking in 10y French names
  • Eurosystem bought EUR 3.9bn of covered bonds on a net basis last month
  • But challenges ahead regarding CBPP3…
  • …given relatively large amount of reinvestments in coming few months

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Cariparma and OMA Savings bank have smooth ride

The market is still receptive for new deals, as was illustrated by the two deals that were launched yesterday. Cariparma sold a long 8y benchmark deal, which was actually also very much underlining this year’s developments in the covered bond market. It already sold a 8y deal in March at ms +53bps, but yesterday’s benchmark was printed at ms +15bps, reflecting the strong tightening in spreads this year. Moreover, while the issuer paid a new issue premium in March, the new bond was issued at the issuer’s curve in our view. Still, demand was solid, with an order book of EUR 1bn.

Meanwhile, OMA Savings Bank successfully entered the covered bond market by issuing a EUR 250mn 5y sub-benchmark. In the end, the deal was printed at ms +1bps, which was 4bps inside guidance. It still offered a 8bps pickup versus the SPMTBK 0 ⅛ 10/24/22.

Some profit taking in French names

It was a relatively quiet trading day yesterday. Spanish paper remained best bid, while we saw some profit taking in 10y French names. Furthermore, Nordic and Canadian names were well offered, but spreads remained stable.

Eurosystem bought EUR 3.9bn of covered bonds in November

The Eurosystem bought EUR 3.9bn of covered bonds on a net basis in November. This was EUR 4.3bn on a gross basis, as reinvestments were EUR 410mn. The numbers were roughly in line with our expectations that the central bank will buy 3-4bn on a net basis (which we think will remain the case next year).

CBPP3 challenges ahead for Eurosystem

However, it will be a challenge for the Eurosystem to buy EUR 3-4bn on a net basis in December, also given that it needs to reinvest EUR 1.5bn. This is especially true when taking into account that activity in the primary market is likely to remain subdued this month, while the central bank will also take a break between 21 and 29 December. So, it is likely that covered bond purchases will decline in December. Having said that, the CBPP3 programme is rather flexible, with the central bank being able to smooth reinvestments. Indeed, we expect it to increase covered bond purchases at the start of next year when we expect a strong pick up in new issuance. But in January, reinvestments are also relatively high (EUR 2.9bn), so this will probably mean that reinvestments will be smoothed further forward.

The bottom line is that the central bank will most likely remain very active in the covered bond market. This holds for the primary market as well as the secondary market, given the relatively large amounts of covered bonds that we expect the Eurosystem to buy in coming months. This, in turn, will continue to exert downward pressure on spreads.

Other news:

* Moody’s assigned a Aaa rating to the covered bond programme of Valiant AG. There is no rating buffer.

 

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