European financial markets opened positively this (Monday) morning, prompting some syndicate bankers to flag the possibility of the benchmark covered bond market reopening this week. But with parts of Europe on holiday today, activity tomorrow will be key.

“Generally the market is looking better, with the financial sector in better territory,” said a covered bond syndicate official, citing tightening of around 20bp in CDS indices and in senior unsecured cash bonds.

“The broader market is also better,” he added, pointing to the iTraxx Crossover Index moving inside 600.

The movements pointed to investors feeling that the sell-off that took place last week was “a bit overdone”, he said.

Another syndicate banker said the covered bond market was very quiet, with very few flows to be observed, partly on account of a public holiday in parts of Europe today. However, he described as “fantastic” the tightening of senior unsecured spreads, despite the movement coming on the back of only light volumes.

Market participants were “warming up” a bit, he said.

“People are coming back from their vacations, conversations are taking place,” he said. “If things remain as they are today I think we will see covered bond or SSA trades.”

But he cautioned that sentiment could change when the US markets open, and that investors were still wary and keen to see a “consensus view”.

This could be provided by a new issue, which would reassure investors and open the door to more secondary market liquidity, he said.

German Chancellor Angela Merkel and French president Nicholas Sarkozy are due to meet tomorrow (Tuesday) to discuss the European sovereign debt crisis, although the focus is understood to be on long term governance issues rather than short term measures to battle the crisis.

The other syndicate banker noted that the tightening of senior spreads could lead to issuers feeling that a balance had been somewhat restored between senior unsecured debt and covered bonds as issuance options, although this would require the tightening of senior spreads to continue for at least a few more trading sessions.

Investors focussing on the underlying credit of issuers rather than the collateral backing covered bonds may also be encouraged by the movement in senior spreads, he added.

“It’s constructive,” he said.

There is potential for issuance toward the middle of this week, he suggested, although the covered bond market will look to the SSA market for leadership.

Another syndicate banker said that deals for the State of Berlin and KfW last week demonstrated that investors were prepared to absorb new supply, despite low yields. The summer holiday period was gradually coming to an end, and it was time to assess issuers’ willingness to tap the market, and at what prices, he added.

Danes in Asia

Nykredit Realkredit has mandated DZ Bank for a non-deal fixed income roadshow in Asia that started today.

Denmark’s mortgage credit institutions are understood to be interested in recruiting Asian accounts as covered bond investors to make up for any sell-off of the asset class by Danish banks should it fail to be placed on a par with government bonds in terms of eligibility for liquidity buffers under the Capital Requirement Directive.

In an interview with Bloomberg at the end of June Nykredit group managing director Karsten Knudsen said that the institution “recently got on the approved list of the central bank of China”.