A National Loan Guarantee Scheme (NLGS) for the UK that provides up to £20bn of government guaranteed funding over two years will have a limited impact on the covered bond market, said market participants, after Barclays launched the first deal under the scheme yesterday (Wednesday).

Royal Bank of Scotland, Barclays, Bank of Scotland, Lloyds TSB, NatWest, Santander, and Aldermore have agreed to participate in the process.

Matthew Pass, head of FIG DCM at RBC, said that even if the new government guaranteed debt is not eligible as level one assets counting towards liquidity buffers, bank treasuries would still be interested in the asset class because they view it as cheap Gilts and a safe place to invest their cash.

However, Pass said that covered bond issuance by UK banks is unlikely to be affected by the sale of government guaranteed debt under the NLGS, noting that each UK financial institution’s allocation is relatively small compared to their overall balance sheet size. And while other real money investors could also see it as an attractive asset class, current redemptions of debt issued in 2008-2009 under a UK government guarantee scheme are far outstripping the anticipated new issuance of guaranteed debt under the new scheme.

“It won’t have an impact on covered bond supply,” agreed Frank Will, head of covered bond and supra/ agency research at RBS. “It’s probably replacing senior unsecured funding rather than covered bonds given the current large spread difference between the two asset classes.”

“It’s only a £20bn programme, so it’s not massive,” noted Will, adding that between 2008-2010 Europe saw roughly Eu1tn across all currencies in government guaranteed debt.

“That of course had a crowding-out effect,” he said. “But this NLGS has two years to do £20bn, so it won’t be significant.”

He said levels in sterling could be affected a bit if the issuers only sell sterling deals and used up the £20bn in a short period given that the guaranteed issuance can have only maturities up to five years.

Dhiren Shah, syndicate official at Credit Suisse, also said he does not expect the programme to have a large effect on the sterling covered bond market.

However, he noted that the participating banks would be selling the government guaranteed issues at 55bp-60bp over Gilts, which could help improve covered bond spreads, which are currently quoted anywhere between Gilts plus 100bp and 150bp.

A syndicate official said there might be some sort of scope for cannibalisation of covered bonds, but the that the extent of this would be limited.

“It is unlikely to have a huge effect because, for example, what has been used for a Barclays government guaranteed senior unsecured as a comparable is National Rail,” he said.

Barclays launched a £1.5bn five year government guaranteed senior unsecured deal at 55bp over Gilts as part of the first tranche of the £20bn of total issuance.

“I haven’t seen any impact on the levels for covered bonds,” said the syndicate official.

Another banker said Barclays would do a five year sterling covered bond about 100bp back of this level.

“It’s just a cheaper way of holding Gilts,” he said.

The Covered Bond Report understands that tranches of £5bn are expected to be completed every six months over a two year period.

Shah at Credit Suisse said there would be a different investor base for covered bonds versus government guaranteed senior unsecured.

“The rates based investors will be looking more at the government guaranteed,” he said.

According to the guarantee, the maturity must be between one and five years, with one-third of the £20bn maturing between three and five years.

Shah at Credit Suisse said this would not affect the short term sterling floater market, which has accounted for £3.9bn of total sterling issuance (£9.15bn) this year.

“The short term floater is not dead at all,” he said. “There are good economic reasons to carry on with this.

“I see a market for all three areas – government guaranteed, floater and fixed.”