Reluctance on both sides as big picture undermines plans
The euro covered bond market today (Friday) finished a week of inactivity with market participants uncertain about the next move, with sentiment having taken a negative turn this morning and issuers and investors holding back at prevailing levels.
Toronto-Dominion Bank was able to launch the largest ever dollar covered bond this week, a $5bn two tranche issue, but no new euro benchmarks were launched.
“We all know that most of the stuff beleaguering the covered bond market is the macroeconomic stuff,” said a banker, “and we can’t do anything about this.
“We all know how things look and they don’t look great.”
Another banker said the market was not in very good shape, citing a fall in European equity indices by a couple percentage points and a drop in Bund yields of some 5bp-6bp.
“It’s taking a turn for the worse,” he said. “It’s very difficult to plan ahead in this kind of market.
“You just need to be ready to pull the trigger if there’s a window.”
But he was positive the market might yet stabilise over the day.
“Maybe once the US get involved we’ll be able to close on a more positive tone,” he said.
President Barack Obama announced a $450bn jobs package after US markets closed yesterday (Thursday) evening.
“And if we don’t see any issuance next week,” added the banker, “that could be good because a hiatus might improve investor appetite.”
Absolute yields were also acting as a deterrent, said syndicate officials.
“Investors want yields we can’t achieve and issuers aren’t willing to issue at these spread levels,” said a syndicate official. “There’s a solid window Monday and Tuesday but we have to resolve these hurdles first.
“There’s nothing fundamentally broken about the market,” he added. “There are no major structural problems; we just have to wait for maybe an issuer who is willing to pay these levels or a group of investors who will buy.”
A banker suggested a national champion would be the most likely candidate to re-open the market, but it would have to be one from a core country.
“Don’t expect anything from Spain or Italy,” he said.
He added that any issue would most likely be in the three or five year maturity.
“There’s still good demand for three and five year,” he said. “Long dated will be a bit more difficult if the market remains as it is today.”