New issue conditions for euro benchmark covered bonds are being undermined by shaky broader market conditions, syndicate officials said this (Monday) morning, with a period of stability needed before deals become a concrete prospect.

Nearly two weeks have elapsed without any new benchmark euro covered bond issuance, with a Eu1bn five year issue for Axa Bank Europe SCF from 3 April the last such deal before macroeconomic and peripheral sovereign concerns resurfaced to pull the rug out from underneath the markets.

A syndicate official said that markets were weak this morning, with indices considerably wider and equities just about even.

This comes after a sell-off on Friday afternoon on the back of weak Chinese growth data, despite better than expected earnings results from JP Morgan and Wells Fargo, according to another syndicate banker, with global equities down by 2%-3%, swap rates rallying to lows, credit indices wider and Spanish government bond yields passing the 6% mark.

Peripheral covered bond spreads gapped out by around 25bp over the course of last week, he added, with French covered bond spreads wider by around 5bp but safe haven flows helping Scandinavian and Pfandbrief spreads stay fairly stable.

Another syndicate official said that a sell-off on a Friday afternoon “promises nothing positive”, adding that the “the party is over”.

Trading patterns were defensive this morning, he said, with market participants wishing for a few days of stability after Spain and France have been in the headlines.

François Hollande, Socialist Party presidential candidate

France is holding presidential elections this year, with the first round taking place on Sunday, and market participants have previously identified the elections as a potentially unsettling factor for the broader markets.

Another syndicate banker noted that credit indices are considerably wider this morning, and that issuers would be advised to wait for market conditions to stabilise.

However, issuers from core jurisdictions could be new issue candidates, he suggested, mentioning “a strong French issuer” like Caisse de Refinancement de l’Habitat and a German Pfandbrief issuer.

But investors are tending to be hesitant, he added, and market participants are waiting for a first strong deal to be launched, which could for example be an agency transaction.

It was said that the reference to CRH as a potential new issue candidate was possibly linked, at least in a first instance, to its chairman and chief executive returning from holiday.

An EFSF auction tomorrow (Tuesday) and a Spanish government bond auction on Thursday were cited as events that could influence the market this week.

Another syndicate banker said market conditions are very weak and unsupportive, and that there is no deal pipeline, even if some issuers may be monitoring the market for new issue opportunities.

A problem, according to the syndicate official, is that widening in Italian, French and Spanish government bonds has left covered bonds from these jurisdictions trading at a tight spread over the government bonds, giving as an example a BNP Paribas March 2022 issue that he said is flat to OATs.

“The spread to govvies is easily negative in Spain, and in France it’s getting quite tight,” he said.

Covered bond analysts have also drawn attention to this development, with RBS analysts last week noting that some French and Spanish covered bonds are trading historically close to their sovereigns given a sell-off of the latter.

“This will likely put pressure on their covered spreads, which tend to operate as a lagged function of sovereign moves,” they said. “This does not bode well for covered bond spread performance in the absence of a rally in the aforementioned government bond markets.”

DZ analysts on Thursday said they recommended investors reposition portfolios in anticipation of further widening of spreads.

A syndicate official said that there has been some buying of single name cédulas in small clips.