Markets were quieter today (Friday) at the end of a week in which intense volatility in bank stocks – prompting a short-selling ban in four countries yesterday – left the spread between covered bonds and senior unsecured bank paper sharply higher.

“Today is a day of rest,” said a syndicate official. “It’s not peaceful; people are tense and sidelined”

Frédéric Oudéa

“Stocks are up a little, Bunds are down a little, but turnover is fairly meagre – although we did lose some of our positions from earlier in the summer.”

No benchmark covered bond supply hit the market this week, and there was little supply in other sectors of the euro fixed income markets, amid searing volatility in equities.

“It really has been a rollercoaster week,” said the syndicate official, “with only six or seven hours in which trades were possible. We were lucky with the Berlin trade, as they were with KfW.” He forecast another barren week for covered bonds next week, with only further zero risk weighted supply.

Another syndicate official agreed, saying that investors and, more importantly, issuers would need a good week of relative calm before venturing into the market.

“I still don’t see enough stability,” he said.

And another said it was too early to call any end to the volatility.

“The situation has not improved yet,” he said, as there are still too many rumours flying around.”

Nevertheless, after four euro-zone countries announced short-selling bans in a range of their financial stocks yesterday (Thursday), European equity indices were moderately higher this morning, with French banks suffering none of the wild swings they faced in the previous three days.

French covered bond spreads were only a little higher than at the beginning of the week, with a syndicate official putting them 5bp-10bp wider depending on maturity. He said that this movement was much lower than that witnessed in senior bank paper.

BNP Paribas’ senior levels, for example, were 50bp-60bp wider over the week, according to the syndicate official, leaving its five year senior unsecured paper at 160bp over. He said that with BNP Paribas covered bonds still at 40bp-45bp over in five years, this had blown out the spread between senior paper and covered bonds – even for a bank that had just reported net profits of Eu4.7bn for the first half of the year.

The differential was even more dramatic for Société Générale, which suffered the worst of the week’s volatility thanks to rumours that chief executive Frédéric Oudéa said were “absolutely rubbish”. While its five year covered bonds were around 50bp-55bp over this morning, its five year senior levels were above 250bp, said the banker.

And banks in other countries were facing similar dynamics: Intesa Sanpaolo August 2016 covered bonds were at around 200bp while the Italian bank’s January 2016 senior bonds were at some 380bp over.

“The spread between the two is huge,” said the banker. “Will covered spreads widen? Will senior tighten?”