February got off to a slow start in benchmark covered bonds, with no new issues out today (Monday), and bankers expect a quiet week, potentially cut short by an ECB meeting. The euro market grew in January, but only marginally, and supply is still set to be clearly net negative.

January ended on a strong note where supply volumes are concerned, with five new issues hitting the market last week, four on one day, but this has not carried over into this week. Indeed, the euro fixed income markets were quiet overall this (Monday) morning, with only two corporate deals out, according to syndicate officials.

And in benchmark covered bonds there is not much of a deal pipeline to speak of, they said, with only roadshow mandates publicly known. Kommunalkredit Austria is on a roadshow until Thursday ahead of a potential public sector benchmark – HSBC, LBBW, Natixis, Raiffeisenbank International and UniCredit have the mandate – while NordLB is meeting with investors in connection with its aircraft Pfandbrief programme. It is working with Commerzbank, DZ Bank, NordLB, Société Générale and UniCredit.

Commerzbank wrapped up a roadshow of its structured SME backed covered bond programme last week, but is not expected to move ahead with a deal for another week or two given the non-deal status of the roadshow and the bank being in blackout ahead of full year results on 13 February.

“It will be quiet this week,” said a banker. “Issuers aren’t in a hurry to come to market, a lot are in blackout, and there’s been a lot of supply already. If anything, activity will probably be more on the AT1 side.”

Market conditions are at least passable, according to syndicate bankers, with one saying that the underlying tone is constructive and that as long as an “appropriate premium” is offered at the beginning deals are possible.

Any new supply in benchmark covered bonds this week would probably have to hit the market tomorrow (Tuesday) or Wednesday, according to syndicate bankers, given a meeting of the European Central Bank on Thursday, which some market participants expect to announce a deflation-tackling rate cut, and US non-farm payrolls on Friday.

“It’s looking pretty relaxed in the primary market,” said a syndicate official, adding that he has more expectations for deals next week, such as from Nordic issuers.

Another said that the market is “painfully quiet” and that he hopes that issuance activity will pick up as issuers emerge from blackouts.

Sluggish supply here to stay

Euro benchmark covered bond issuance totalled Eu19.5bn in January, according to data from The Covered Bond Report, including a tap for Landesbank Hessen-Thüringen (Helaba) but excluding a Eu500m three year FRN included in a Eu1.5bn UniCredit SpA dual tranche transaction. As such, supply this year started in a similar vein to 2013, when new issuance in January amounted to Eu20.31bn.

Covered bond analysts noted that redemptions were lower this January compared with in 2013, totalling around Eu18bn versus Eu35bn last year, but that the fundamental outlook is still for supply to be significantly net negative this year.

Even though peripheral issuance could increase in the event of further spread tightening “the market remains on track for the second year of high negative net supply”, said Bernd Volk, head of covered bond research at Deutsche Bank.

Michael Spies, strategist at Citi, said that although supply this January boosted the size of the covered bond market, the net growth was extremely small.

“We don’t want to sound all too pessimistic after just four weeks but primary market activity during the first month of 2014 has been a seamless continuation of sluggish market activity in 2013,” he said.

Citi analysts expect the market to shrink by Eu17bn by the end of the first quarter.

“In February, we expect a similar volume of redemptions, totalling Eu19.4bn with 46% recorded in the Spanish covered bond market,” said Spies. “If the issuance pattern of this year followed 2013, a meagre gross issuance volume of around Eu30bn in Q1 would be the result.

“This would stand in contrast to redemptions of Eu47bn, leading to net negative supply of Eu17bn in the first quarter of 2014.”

Citi analysts expect net negative issuance of Eu42bn for 2014.

Joost Beaumont, fixed income strategist at ABN Amro, noted that only two new issues this January featured a short term maturity of three to four years, with issuers focussing on the intermediate to long end of the curve.

“Twelve out of the 22 new deals were in the five year to eight year tenor, while eight deals had a maturity of 10 years or longer,” he said. “Looking at the geographical split, French issuers sold the largest amount (Eu4.75bn or 24%), followed by those from Italy (Eu3.25bn), Australia and Germany (both Eu2.25bn), and Finland and the Netherlands (both Eu1.5bn).”

Citi’s Spies said that peripheral issuers’ share of total volume, at 23%, is in line with their level of activity in January 2013, but that this year Italian banks were responsible for the bulk of supply, with only one Spanish bank having tapped the market this January. That was a Eu500m five year deal for debut issuer Banco Mare Nostrum on 8 January.

A syndicate official said he isn’t expecting much covered bond activity from Spanish issuers, saying that they have limited funding needs and still seem to have a preference for the senior unsecured market despite supply there having struggled in the latter half of January

“They’re not really that interested,” he said.