Covered bonds will need a couple of days of stability in the broader market before new issues are considered, bankers said today (Friday), while a leading investor said the back-up in Bund yields is the worst he has seen and could mark a turning point rather than a mere correction.

Bankers said the market seemed to be in better shape today, noting that 10 year Bund yields were roughly unchanged today, at around 0.60%, having hit highs of 0.80% yesterday before falling again. However, they predicted a lull in primary market activity to continue next week.

“Today things look quiet,” said one. “The Bund sell-off hasn’t continued and hopefully the market is consolidating. The market will need a couple of days off.

“Covered bonds have been resilient, but investors need to see more stability and issuers have to be aware of this,” he added. “I wouldn’t expect any issuance until Tuesday at least.”

The most recent benchmark euro covered bond issue was a Eu1bn seven year from Bank of Ireland on 29 April that was only marginally oversubscribed as bookbuilding was negatively affected at the start of the volatility.

The only euro trade this week was a Eu150m tap on Wednesday of a Caffil Eu500m 20 year deal that was initially sold on 15 January.

The only new covered bond benchmark was a $1bn (Eu883m) five year Eurodollar from Swedbank on Wednesday, which led bankers to speculate that more issuers might consider launching deals in currencies away from euros if the volatility continues.

Noting that equities were up 0.5% across most of Europe, one banker was optimistic that euro primary market activity would resume if the improvement is sustained.

“There’s no reason we can’t move forward with primary activity if things clear up,” he said.

Another syndicate official agreed, adding that the back-up in rates could have a positive impact.

“It certainly feels more stable after that massive volatility in Bunds,” said a syndicate official. “We need a couple more days, but this back-up will recalibrate fair value for some people, and potentially put value back in the asset class.”

The syndicate official noted that some investors were already returning to the secondary market.

“Absolute yields are higher, spreads have only moved by a basis point or two, but some investors will see this as a buying opportunity,” he added.

However, Andreas Denger, senior portfolio manager and covered bond analyst, at MEAG, adopted a cautious stance when discussing the volatility at an ICMA Covered Bond Investor Council and The Covered Bond Report conference in Frankfurt yesterday (Thursday).

“At first it looked like a small correction,” he said. “Now, I don’t know – it could be a turning point. I think it was the biggest move I have ever seen on the bond market. It really makes you think.

“Every time there has been some support coming in it can be wiped very quickly and all of the performance you made this year is now wiped away – we are back at Christmas levels, more or less. So sometimes you need to ask yourself, even if you think there might be the floor in terms of the correction, will I go negative with my performance or will I try to save the last basis point I have for my account, and just sell everything and be short or neutral – and this can of course spur another sell-off in the market.”