A positive response to ECB buying of Spanish and Italian government bonds has not increased the likelihood of a reopening of the covered bond market ahead of – market conditions permitting – an end-August or early September restart, syndicate bankers said this (Monday) morning.

The European Central Bank late yesterday (Sunday) issued a statement after an emergency conference call of its governing council in which it said it would “actively implement” its Securities Markets Programme (SMP) and the central bank is said to have bought Italian and Spanish government bonds this (Monday) morning, leading to a fall in yields.

The ECB’s statement was followed by one from the G7 this morning, which set out the group’s “commitment to take all necessary measures to support financial stability and growth in a spirit of close co-operation and confidence”.

These steps came after a worsening of the euro-zone debt crisis last week a downgrade of the United States from AAA to AA+, on negative outlook, by Standard & Poor’s on Friday.

Syndicate bankers said that the ECB’s intervention had clearly had an impact on peripheral government bond markets, but that this was only marginally spilling over onto peripheral covered bonds, with some Italian and Spanish issuance around 10bp-15bp tighter.

But while the Italian and Spanish markets were moving in a clear direction, other markets were still very volatile, they said.

“The volatility is crazy, and everything is still quite weak,” said one. “The markets are drifting in both directions.”

Credit indices were tighter, as were Spanish and Italian government bonds, while the yield on the 10 year Bund had increased by around 15bp this morning and the Bund future opened nearly 120 basis points below Friday’s close, he said.

“Everything’s on hold, even if the pipeline is there and even growing,” he said. “A combination of the holiday season and this mad volatility means that you can’t get investors’ attention.

“Any deal announcement would just go up in smoke given the intra-day volatility.”

But another syndicate official suggested that the holiday season was not that relevant a factor, and that if market conditions would allow for new benchmark supply issuers would take advantage of this. However, he said that market conditions were not ripe for a resumption of benchmark supply, adding that today would be a day of orientation, with more time needed to get a sense of the market’s direction.

“The mood is cautious,” he said. “The next step is to see when investors come back into the market, because at the moment they are standing on the sidelines and watching.”

Others also said that the weekend’s events have not changed the supply outlook, identifying the end of August or beginning of September as the earliest resumption of primary market activity.

“There is a better bid for some Spanish names, but as always the covered bond market is a lot slower to react,” said one syndicate official. “People are very focussed on the sovereign elements of their portfolios, so we’ll see over the next couple of weeks how things filter through to covered bonds.”

Another syndicate banker said that his perspective on the pipeline had not changed, and that he saw the ECB’s buying as “one step of hopefully many”, even though it was a material one.

“It prepares us to settle on an equilibrium that leads to issuance by next month,” he said. “The ECB clearly had an impact on the peripheral market, but let’s not judge the rest of the week on one day.”

Standard & Poor’s downgrade of the US’s long term rating from AAA to AA+ on Friday was played down by syndicate bankers, with one saying that it has a very limited effect on the dollar bond market and another saying that the rating action did not come as a surprise, and had not triggered a panic reaction.