The covered bond market was quiet this (Monday) morning due to uncertainty about budget negotiations in the US and the political situation in Italy, and while it is likely to stay that way for the rest of the week positive news from the US could yet herald supply, said bankers.

After stable, positive market conditions last week allowed for a raft of new issues – four in one day on Wednesday – weekend news-flow intervened to make for weaker market sentiment this morning, with syndicate bankers generally expecting muted activity in the benchmark covered bond market this week.

This is mainly due to political developments in Italy and US that are casting a shadow – the prospect of a federal government shutdown in the US if Democrats and Republicans cannot agree on government spending today; and uncertainty about the future of the Italian government after Silvio Berlusconi withdrew his support for the coalition. The country’s parliament will hold a vote of confidence on Wednesday.

“The market doesn’t look red-hot,” said a syndicate banker, who acknowledged that this was perhaps an understatement but emphasised that uncertainty is the main obstacle to better market conditions.

He said that the US situation was the markets’ main focus, with Italian political developments “in the background” and, although clearly relevant to peripheral issuance plans, not that significant for core jurisdictions.

Other syndicate officials said that they are not expecting much supply in covered bonds this week, citing the US and Italian political situations as well as a meeting of the European Central Bank on Wednesday, a German public holiday on Thursday, and US non-farm payrolls on Friday.

One said that he is expecting less supply than he had been before the weekend, but that “things could go both ways” depending on the outcome of today’s negotiations in the US. If these are positive then there could be a chance of deals hitting the market tomorrow (Tuesday) although “it could easily turn into a quiet week”, he said.

Two Italian banks are roadshowing covered bond programmes, and although the uncertainty about the political situation in Italy does not therefore directly affect any imminent deal plans it has made the environment more challenging for them, according to market participants.

Italian government bond spreads widened some 30bp-40bp last week, and Italian covered bond spreads were 5bp-10bp wider, according to syndicate officials.

“It’s not an ideal time for them to issue,” said one, “and worth waiting.”

Banca Popolare dell’Emilia Romagna (BPER) has been on the road presenting its obbligazioni bancarie garantite (OBG) programme to investors, and wraps up the roadshow this Wednesday. A deal was never intended to be this week’s business, according to a banker at one of the mandated banks – Citi, Mediobanca, RBS, Société Générale and UBS – and the leads will next week assess what, if any, deal opportunities there are.

Italian peer Mediobanca starts a roadshow today, and is working with Barclays, Société Générale and UniCredit in addition to its own investment bank. A syndicate official at one of the banks said that the priority is to hold useful meetings.

Standard & Poor’s on Friday assigned a A preliminary rating to a Eu750m maximum mortgage obbligazioni bancarie garantite (OBG) issue off Mediobanca’s programme. In contrast to S&P’s first rating of Mediobanca issuance – a retained OBG sold in December 2011 – this recent rating incorporates uplift from the issuer rating after the programme was restructured.

Market participants are also expecting an NIBC deal to emerge sometime soon after the Dutch bank finished a roadshow of a new conditional pass-through covered bond programme last Tuesday (24 September). Credit Suisse, LBBW and RBS have the mandate alongside NIBC’s investment bank.

A syndicate banker at one of the leads said that the new issue is still “work in progress” and that because of the new structure it cannot be a “drive-by” transaction. The leads and issuer are working on being in a position to be able to tap the market “once the stars are aligned”, he said.