Bankers said this morning that stress test results due to be released after the market’s close today (Friday) will have only a minimal impact, but still provide an excuse for covered bond issuers to stay on the sidelines in a week when sovereign debt fears increased on both sides of the Atlantic.

“I don’t think anyone really cares about the stress tests,” said one. “The newspapers have all hinted at them being rubbish anyway.

“People know that quite a few banks are not as solid as they should be, but everything is overshadowed by the global market.”

Another syndicate official said issuers were using the stress tests as another reason to remain in wait and see mode.

“Market sentiment is still too bad to think about launching anything,” he said. “Everybody is waiting, and it’s not just because of the stress tests, but also because of Italy and Europe in general.”

Obama meeting Republicans over debt ceiling

Auctions of Italian government bonds yesterday (Thursday) went better than some had feared, but failed to stem nervousness, with market participants then turning their attention to the US.

“Nobody believed the Italian bond auction would have been allowed to fail,” said a covered bond banker. “But it doesn’t do us any good.

“The next worry is the US deficit cap, so that’s going to be a problem in the market over the next couple of weeks,” he added.

And although market sentiment improved into the second half of this week, another syndicate banker described it as consolidation phase, rather than offering any solid hopes of recovery.

“We’re living hour by hour, day by day,” he said, adding that he doubted any issuance would be forthcoming before the summer break.

A DCM banker sounded a more positive note, saying that while widening of more than 100bp in peripheral spreads on a two to three day cumulative basis was “spectacular”, the market will recover.

He said that looking over the course of the year euro-zone sovereign fears have not hurt issuers’ funding plans, and the covered bond market is in “extremely good shape”. While on the buy-side, he said, investors need to put money to work, noting that redemptions of government-guaranteed debt this year will “pour” into covered bonds. He added that the covered bond investor base continues to grow at the expense of senior bank debt and also partly at the expense of asset-backed securitisations.

However, he said that it is positive that the traditional break in issuance over the summer is due to start.

But while the DCM banker noted that the year had been the best yet for covered bonds since the onset of the crisis, others were less confident in their diagnoses of the market’s condition.

One banker drew comparisons with the state of play in early 2009 when the market was at a near standstill and said that the situation was even more difficult.

“I think we’ll be lucky if we only reproduce what happened back then,” said one.

Another agreed the market could end up much worse than in between the collapse of Lehman Brothers and the announcement of the European Central Bank’s covered bond purchase programme in May 2009.

“In 2008 you didn’t have Greece or Ireland,” he said “Now it’s the sovereigns that can’t fund themselves.”

He noted how sovereign CDS were barely looked at or traded back then, but that the Markit iTraxx SovX had since risen to an all-time high. In 2009, it was at around 40bp, he said, whereas in 2010 it was at 70bp, and today it sits at 282bp.

“Effectively, we’re back to pre-euro levels, when every country had different interest rates,” he added.

Another banker highlighted other differences between then, when most banks could only access the market with the benefit of government guarantees, and now.

“The bank market is not shut per se,” he said. “It is not a liquidity crisis in the bank sector, but a liquidity and solvency crisis in the sovereign space.”