Stronger than expected issuance activity from corners of the covered bond market such as Canada have led some analysts to lift their supply forecasts for 2014, while in some cases cédulas expectations have been lowered, with fears that the ECB TLTROs could cut funding needs also flagged.

LBBW analysts have responded to primary market activity in the first half of the year by raising their forecast for full year euro benchmark issuance, from Eu92bn to Eu105bn. Positive developments in Canada and Italy prompted the analysts to lift their expectations for supply from those countries, by Eu5.5bn for Canada and by Eu5bn for Italy.

“In Spain, by contrast, we had expected far more bond issues at the start of the year,” said Karsten Rühlman, credit analyst at LBBW. “The weak trend in H1 2014 has led us to lower our forecasts from the initial Eu16bn to Eu8bn.”

Based on their adjusted forecast, the LBBW analysts expect total issuance of Eu40bn in the second half of the year, after benchmark supply of Eu66bn in the first six months of 2014.

Matthias Melms, covered bond analyst at NordLB, said that stronger than expected activity from Canadian and Italian issuers has led NordLB analysts to increase their supply expectations for 2014 from Eu117bn to Eu121bn.

“At the beginning of the year we were predicting significantly stronger issuance from Spain, but we were too optimistic, and Spanish issuers are Eu5bn short of where we expected they would be,” said Melms. “However, Canada has exceeded expectations and is racing ahead, with Eu5bn issued in the first half and we expect Eu2bn for the second half of the year.

“The euro-US dollar basis swap has been attractive for those issuers that do not have the euro as their home currency,” he added, “but it is volatile so it remains to be seen whether conditions will change in favour of US dollars.”

Jennifer Levy, analyst, covered bonds and agency markets at Natixis, told The Covered Bond Report that her supply forecast remains unchanged from the start of the year, with expectations for between Eu100bn and Eu110bn of supply for the year. She said that this could represent an increase of up to 15% on issuance in 2013, which reached Eu93bn.

Despite her overall forecast remaining unchanged, Levy notes that the forecast for Spanish issuance has been cut. She said that Natixis analysts had expected Eu12bn of Spanish benchmark covered bonds to be issued in 2014, but that only Eu4.5bn has been sold so far this year. Natixis analysts now estimate that cédulas issuance will add up to Eu6bn-Eu8bn in 2014.

However, Levy noted that Canadian supply has been higher than expected.

“The swap rate between euros and US dollars has driven Canadians to the euro market,” she said.

Barclays covered bond analysts’ prediction for full-year issuance remains unchanged at Eu130bn, although in contrast to the other analysts’ figures this also captures non-euro supply. They noted that the primary market finished the first half of the year strongly, with issuance in June reaching Eu14.3bn, Eu4.3bn more than they had expected. H1 supply of Eu72.5bn, including US dollar, Swiss franc and Australian dollar deals, is 56% of their full year forecast, according to the analysts. However, they anticipate the covered bond market to be subdued in July and August.

They noted that 2014 supply has been dominated by euro issuance, representing 96% of the first half’s total, up from 80% for the same period last year.US dollar supply has fallen by 11%, accounting for just 3% of total issuance for the year-to-date, according to the analysts.

Cristina Costa, senior covered bond analyst at Société Générale, said that her forecast remains unchanged, for Eu110bn of benchmark supply for the full year.

“Combined with euro covered bond redemptions of Eu155bn, this means the covered bond market should shrink for the second year in a row, by Eu45bn,” said Costa. “High covered bond redemptions in Spain (Eu48bn) and Germany (Eu33bn) should support both markets.”

Michael Spies, strategist at Citi, has also kept his start-of-year forecast, which put full year issuance at Eu113bn. However, while the overall figure is unchanged Spies has amended its geographic composition. Most notable is a six-fold increase in full-year expectations for Portuguese covered bond issuance, from Eu500m to Eu3bn. Like other analysts, Spies has reduced his forecast for Spanish issuance, from Eu15bn to Eu9bn. Unlike some others, he has not increased his forecast for Canadian issuance, but his initial estimate was substantially higher than other analysts’, at Eu10bn for the full-year.

TLTRO supply impact feared

A recent development that could influence how supply unfolds in the second half of the year is an extraordinary measure that the European Central Bank announced in early June: its targeted longer term refinancing operations (TLTROs). The TLTROs, which will have a September 2018 maturity, will be conducted in September and December of this year.

“We fear that the next rounds of (targeted) LTROs by the ECB will further reduce the wholesale funding needs of banks,” said Frank Will, global head of covered bond research at HSBC Trinkaus.

He said that whether this will happen will depend “at least partly” on the opportunity costs of the various funding channels.

He noted that the interest rate on TLTROs will be fixed at the main refinancing rate plus a fixed spread of 10bp. The average two to four year yield levels on many banks’ covered bonds are close to the 0.25% the banks would have to pay for TLTRO money, he said, with only euro-zone peripheral covered bonds trading well above that threshold.

HSBC bank analysts estimate yield levels for stronger European banks for a four year senior unsecured bond at between 0.8% and 1.2%, and between 1.5% and 2% for weaker banks from the euro-zone periphery, he added.

“In light of those figures, we would expect a high take-up of the TLTRO money by banks out of non-core countries,” said Will. “We also believe that even the stronger euro-zone banks will participate in the programme — at least to show their support of the ECB policy targeted at increasing SME lending rather than having actual funding needs.”

The Funding for Lending Scheme in the UK serves as a useful guide as to what impact the TLTROs is likely to have, added Will, noting that following its introduction “covered bond issuance came almost to a complete standstill” and has only recently picked up.