Conditions are stabilising after the shock of Cyprus’s plans to tax depositors, although uncertainty remains high after its parliament yesterday rejected the levy, said bankers, and supply prospects are slim even if some issuers are on the look-out, with dollars maybe a better bet.

House of Representatives, Nicosia

The European Financial Stability Facility (EFSF) launched a tap of a three year bond today (Wednesday) to constitute the only euro primary market activity this morning, but other supply is unlikely to be forthcoming, said a syndicate official. This is despite there not being much of a market reaction this morning to the Cypriot parliament having yesterday rejected a plan to levy depositors as part of a sovereign bailout. The Cypriot government is reportedly in talks with Russia about a loan.

“Things are slightly better, and stabilising, but it’s not enough to push new issues,” said the syndicate banker.

The iTraxx Senior Financials Index is around 15bp wider than on Monday, he added, although cash prices are holding up.

Another syndicate banker said that market conditions were better than he would have expected after the Cypriot vote, and that this allowed some new bonds to be placed on the corporate and SSA side. Milder than expected reactions were also seen in the secondary covered bond market, he added.

A few FIG issuers are in the pipeline and were “ready to pull the trigger” before their plans were scuppered by the weekend Cyprus news, according to another syndicate official, who said that senior unsecured and covered bond formats were/are under consideration. And although the market is open to core jurisdictions and these issuers are monitoring conditions daily, the situation may be too “shaky” to launch new deals, said the banker.

“The focus is very much on core,” he added, “but it is tricky for issuers to look at the market now because they would have to be careful on pricing.”

New issue premia would need to be paid, he said, and there is a risk that Pfandbriefe transactions, for example, could trigger a repricing of core markets.

Another syndicate banker said he is not expecting any benchmark covered bond supply this week, and that it would not make sense to bring a new issue because uncertainty remains high even if volatility is constrained.

“Cyprus is a smaller problem, but it is still preoccupying investors because the outcome is unclear,” he said.

In setting out to make depositors pay toward the cost of bailing out the sovereign and thereby failing to uphold a government guarantee, Cyprus threw out the capital hierarchy textbook and the implications of this have rattled investors across the market.

The syndicate official said that an anchor-demand-driven tap or new issue is the only type of primary market activity in covered bonds that he could imagine happening this week, but said that he thought this was unlikely, too.

“No-one wants to be a Braveheart because it’s unnecessary and there is no big funding pressure,” he said. “The past five years of crisis have shown that better days will come.”

The US dollar market is more attractive for low beta issuers at present, said another syndicate banker, noting that 12 deals across corporates and SSAs were priced yesterday.

“A bigger move in the US dollar/euro basis makes issuance for low beta issuers from here more attractive,” he said. “For today you could expect euro market activity to remain subdued, while the US remains the place to go.

“Investors will keep an eye on the Fed’s two day policy meeting, but Yankee low beta issuers can enjoy the improved basis terms, a deeper demand and lower execution strategy across senior and covered.”