Covered Bond & RMBS Comment – Eurosystem stepped up secondary purchases

by: Joost Beaumont

  • Primary market increasingly shifting in Christmas mode
  • ABN AMRO set up second covered bond programme for retained purposes
  • Likely replacing (retained) RMBS programmes
  • Sellers of Dutch names in the belly of the curve, buyers at short-end
  • Eurosystem stepped up purchases in the secondary market
  • Spanish RMBS SRF 2017-2 launched

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Primary silence

The primary covered bond market remained silent yesterday, following the Italian deal of Cariparma on Monday. It seems that the window to the market is gradually closing, although we still think that deals can still be done. In a way, conditions should be favourable, with some EUR 6bn of redemptions, of which the Eurosystem will need to reinvest EUR 1.5bn. Still, issuers might prefer to wait to the start of next year, when redemptions will also be high and all investors will be ready to put their money to work. As such, new conditions are set to remain very favourable for the time being.

ABN AMRO set up second covered bond programme

ABN AMRO has set up a second covered bond programme, which is likely to have a soft bullet structure (being merely a copy of the existing programme). The second programme will be used for retained purposes only, likely replacing (retained) RMBS programmes over time. As such, it is unlikely to affect issuance of publicly listed covered bonds. We have pencilled in some EUR 10bn of issuance of Dutch euro benchmark covered bonds next year, which would make the Dutch market the third largest after Germany and France.

Long-end Nordics in demand

The secondary market is also slowly moving into Christmas mode. Still, there were buyers of Dutch paper in the short-end of the curve, while we saw sellers in the belly. Furthermore, investors were looking for Nordic paper at the longer end of the curve. Spreads remained stable, although recent new issues continued to perform.

Eurosystem back in secondary market

The Eurosystem bought EUR 1.1bn of covered bonds last week under its third covered bond purchase programme. This was a net, as well as a gross figure, reflecting that there were no redemptions. We estimate that the central bank settled EUR 0.2bn of purchases in the primary market. This left EUR 0.9bn of secondary market purchases, translating in daily average purchases of EUR 175mn. This, in turn, was a strong increase compared to the amounts bought in previous weeks (on average EUR 100mn), and underlining our view that the Eurosystem needs to rely more heavily on the secondary market in December (see yesterday’s comment). What is more, this also reflects that the central bank probably frontloads purchases, as it will take a break from 21-29 December.

New Spanish RMBS

Spanish Residential Funding is in the market with Spanish RMBS SRF 2017-2. Most tranches have been party preplace. The EUR 103mn most senior tranche has a rating of AAA/AA+/Aa2, CE 42.2%, and a WAL of 3.8yrs. The deal will be backed by Spanish residential mortgages issued by Catalunya Banc (and predecessors), which have a CLTV of 59.7% and a seasoning of 9.7yrs. In March, the class A tranche of SRF 2017-1 was issued at 3mE +90bps.

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