Market conditions this week have yet to prove conducive to a resumption of benchmark covered bond supply, although reactions to a downgrade of Italy by Standard & Poor’s yesterday (Monday) were contained this morning and markets quieter after a difficult session yesterday, according to syndicate bankers.

S&P cut Italy’s credit rating by one notch, from A+ to A, on negative outlook, a move that syndicate bankers said was not surprising, except perhaps in its timing.

He said that the downgrade was “completely expected”, and that investors’ defensiveness vis-à-vis Italian risk was also not surprising. Another syndicate banker said that he had not seen a noteworthy response to the rating action, and suggested that market sentiment was showing signs of recovery.

Another said that there had been a “mini panic” this morning on account of the Italy downgrade and fears over the situation in Greece, but that the markets had settled since, with financials quiet today compared with a busy day yesterday (Monday).

Other syndicate bankers were downbeat in their assessment of market conditions and the likelihood of benchmark issuance.

“Yesterday we were already in risk-off mode,” said one, “and today we are completely in shock-induced rigidity.”

Risk parameters such as CDS levels and iTraxx indices were at “old highs”, he said, with the Bund future having climbed above 138 and senior unsecured financials widening, in particular weaker German institutions with exposure to Italian risk, and French banks.

Many market participants had expected benchmark covered bond supply to resume this week, he added, and until Friday midday this looked possible given relatively positive sentiment.

A focus over the weekend on the possibility of an imminent Greek default undermined such hopes, however, according to the banker.

“I’m just watching, hoping, praying for a hint of a political solution,” he said, adding that “substantial good news” was needed to turn around sentiment.

Another syndicate official said that market conditions were better today than yesterday, but that a string of constructive sessions was needed, in addition to consistency in secondary market trading, higher absolute yield levels, and improved general market and sovereign conditions.

Deutsche Bank is due to today price a Eu100m two year floating rate note for Landesbank Hessen-Thüringen, at 15bp over three month Euribor.

A syndicate official said that this was equivalent to 10bp through six month Euribor, which he deemed “extremely” expensive.