Covered bond issuers kept their distance from the primary market this (Monday) morning, with no sign of the ECB having activated CBPP2, and BTP yields “soaring” – although the EFSF is out with a deal that one banker said could lay the groundwork for supply.

“We definitely opened on the back foot today,” said a syndicate official, “with the saga of Greece continuing and 10 year yields on Italian govvies soaring again.”

The 10 year yield on Italian government bonds rose above 6.60% during the morning, while Bund futures rose.

“Last week before the ECB, we were at around 135 on the Bund,” he said. “Now we’re at 138, which is not helping things.

“We saw this flight to quality on Friday and it’s continued into today.”

Italy was in the spotlight, with rumours that Italian prime minister Silvio Berlusconi was close to announcing his resignation.

“All eyes are on Italy today,” said a banker. “Does Berlusconi stay, or does he go?”

Syndicate officials said there had as yet been no evidence that the European Central Bank has started buying covered bonds as part of a new covered bond purchase programme (CBPP2).

“I’ve heard nothing concrete so far,” said the syndicate official. “I guess the ECB has enough to do today with limiting the contagion.”

Another syndicate official said CBPP2 was one of the few positives at the moment.

“The ECB is standing prepared to act if it’s necessary,” he said, “but it’s only one piece of the puzzle, and you cannot trust the programme alone to help issuers come to the market.

“Secondary trading is very low, with just bits and pieces,” he added.

The European Financial Stability Facility (EFSF) is out with a Eu3bn long 10 year trade today, which market participants were watching closely. The issuer last week postponed an attempted deal of that size and maturity.

“I think everyone is looking at the EFSF trade today,” said a syndicate official, adding that the trade could lay the groundwork for covered bond supply this week. Another banker said it would be an interesting deal to watch.

“It pays a 5bp-10bp premium on an outstanding July 2012, which means about 104bp over mid-swaps,” he said. “This guidance is very appealing, but it’s a question of how much trust and confidence you have in official European issuers.”

Syndicate officials said German covered bond issuers had been considering moving first this week, but had put their projects on hold.

“There are German issuers looking from the southern region of the country,” said one. “They have obviously decided not to move forward with this volatile market.”

Commonwealth Bank of Australia begins a roadshow today, with BNP Paribas and Morgan Stanley working alongside the issuer, while National Australia Bank is understood to have completed a roadshow and ANZ to have started investor work. These three banks are said to be preparing for a euro or dollar issue, while Westpac is said to be doing only dollar investor work. Westpac joined the other three Australians in attaining a triple-A rating for its covered bonds today (Monday).

“All four majors armed and ready!” said a rating agency official.