Today could be the first working Monday this year without any benchmark covered bond supply, although year-to-date FIG supply is said to have surpassed last year’s following a splurge last week, while figures for early LTRO paybacks exceeded consensus expectations.

Shortly after The Covered Bond Report went to press a mandate for a five year Berlin-Hannoversche Hypothekenbank jumbo Pfandbrief was announced, awarded to Barclays, Crédit Agricole, JP Morgan, Landesbank Berlin, and UniCredit.

A new covered bond benchmark has hit the market on every Monday of a full working week so far this year, with today’s break in primary market activity coming after a steady flow of deals last week led to Eu7bn of paper being printed.

A syndicate official noted that FIG issuance exceeded Eu13bn last week, which not only exceeded expectations, but pushed total supply year-to-date past last year’s volumes after it had lagged by 25% only two weeks ago.

An unexpected feature of the aggregate supply picture is that much of the volumes can be attributed to the peripheral market and the impact of LTRO refinancing, he added.

The European Central Bank on Friday announced that 278 financial institutions will be paying back early Eu137.2bn borrowed under the first of two three year longer term refinancing operations (LTROs), a much higher figure than what is said to have been a market consensus of Eu84bn.

Market participants welcomed the early repayment figures, saying the shift from central bank funding to public markets is a positive sign.

A syndicate banker said that the primary market could be quieter this week, but that market conditions seemed constructive and that he expected supply to continue at a decent clip over the next couple of months.

“It feels like we will continue to have ongoing new issuance,” he said. “The LTRO is giving a bit of a signal that some collateral has been returned to banks, and I can only assume that it is better collateral.”

RBS analysts said that the high repayment number is supportive for covered bond supply, especially if repayments of the second LTRO are in line with those of the first.

“Many banks which returned the ECB money will most likely fund part of that money in the primary market and we expect those banks to increase their funding volumes – both in terms of unsecured and secured issuance,” they said. “However, we will also have to monitor how money banks will shift from the three year LTRO into shorter dated ECB repos.

“Some banks might also decide to sell short dated ECB-eligible assets thereby reducing their balance sheet and the funding needs.”

However, others viewed the early repayment volumes as something of a non-event in terms of supply implications, even if it sends a positive signal about issuers’ confidence in market conditions.

“Being positive, you can say that issuers expect to be able to take more out of the public markets with confidence, which I agree with,” said a banker. “But the problem is that a lot of people don’t see the need for a great deal of wholesale funding this year.

“For the southern Europeans, net-net the repayment is a good sign, but the effect of liability management exercises, in the UK for example, is a trend that is still unhelpful for issuance.”

A “worrying” trend for covered bond supply, he added, is that a compression of the spread differential between covered bonds and senior unsecured is causing issuers to lean towards senior unsecured when the market is open.

A syndicate banker said that the amount of LTRO repayments was not surprising, and that the announced figure would likely have a limited impact.

“The market was functioning perfectly well before the number was released,” he said. “I don’t see why it shouldn’t work perfectly well after it.”

As for future supply, he said that he expects senior unsecured deals, especially from peripheral countries, to dominate supply.

“The market is quite aggressively open for peripheral senior deals,” he said, “and we expect that to continue in the short term at the very least.”

The covered bond looks quiet, he added, with “a few Germans” looking at it this week.

France’s BPCE was the only source of FIG supply this morning, via a senior unsecured four year benchmark initially marketed in the low 70s over mid-swaps via sole lead Natixis.