Volatility sparked by a renewed sell-off in Bunds this week is set to decrease demand for any new euro covered bond benchmarks and divert issuance into shorter maturities, according to bankers, who have reined in supply expectations for the coming weeks.

Yields backed up dramatically through the week, with ECB president Mario Draghi offering little solace to the market after a meeting of the central bank’s governing council on Wednesday.

“ECB president Draghi warned markets to ‘get used to periods of higher volatility’ in a world of low interest rates, and markets have obliged,” said credit strategists at Barclays. “The sell-off in Bund yields has already been one of the most brutal on record, with 10 year yields moving 37bp higher between Tuesday and Thursday.

“Few, if any, market participants are likely to have seen anything similar in terms of the current price action in core rates and, as measures of trailing volatility continue to spike higher, this is likely to weigh on risk appetite into quarter-end and likely beyond.”

Bankers said the market still appeared volatile today (Friday), with the 10 year Bund yield fluctuating between 0.85% and 0.90%.

“This historical move is obviously adding to the ongoing negative headlines on Greece,” added a syndicate official, “and they are there to stay now that Greece has deferred IMF payment to the end of June.”

After euro benchmark covered bond supply totalled just Eu2.4bn in May, making it the quietest May in terms of euro benchmark supply in at least a decade, market participants had expected issuance to pick up significantly this month, boosted by increased redemptions.

Some syndicate officials said this morning that they still expect core names to bring new euro benchmark deals to the market, but they added that, in light of this week’s volatility, next week’s supply would probably be more modest than previously anticipated.

Issuers would also have to be mindful of several factors to complete a successful trade, they warned.

“I think we will see some supply, but there’s a lot for an issuer to navigate,” said one. “You need to get the maturity, the premium, the window, and the duration of the execution – be it intraday or two-day – spot on. And of course you need a relatively stable market first.”

The syndicate official suggested a new deal from a core, high quality name would still go well with a new issue premium of 2bp-3bp, citing the outcome of the only euro benchmark trade of the week – a Eu750m eight year Pfandbrief from MünchenerHyp that was increased from Eu500m and tightened from guidance of mid-swaps less 16bp to less 17bp.

“The one difference we could see is that order books are on the lower end of the range for these sort of deals,” he added. “I think in this market issuers might not get the flexibility, in terms of pushing the size, that they’re used to.”

With some issuers in need of funding and with the potential for market conditions to worsen ahead of the summer break, another banker said some names may be forced to come to the market despite wider volatility.

“For the first time issuers will tap the market even if conditions are sub-optimal,” he said.

Another banker agreed, but said issuers must wait for the right window.

“Even on days where we’ve seen 6bp-7bp swings in the 10 year Bund yield, I think that is enough to get a trade done,” he said. “But obviously these extraordinary days of 20bp swings would be damaging for a trade.”

Syndicate officials said that the rise in yields would likely drive issuers and investors towards shorter dated deals, with maturities of six to eight years. One syndicate official stated the yield gap between five and seven years over the last six trading days has risen from around 20bp to 30bp.

“This probably means you keep your hands off the long end,” he said. “If you get caught wrong-footed here, it will ruin you within seconds. At the same time you probably want to make something out of the fact you are getting significantly more yield for going a little shorter than you probably would have gone 10 days ago.”

The syndicate official noted that the most recent euro 10 year benchmark was a Eu750m deal from BNP Paribas on 28 April, which came at 11bp through mid-swaps with a re-offer price of 99.96. Today, he saw it trading at 12bp through with a price of 93.15.

“That’s six big figures in price,” he said. “If you were a bondholder, you would probably not be inclined to get another 10 year investment on board.”

The rise in sovereign yields could also make it more difficult for some core issuers to launch tightly priced deals, bankers said. One noted that French 10 year covered bond secondaries had remained around minus 10bp, while the sovereign is trading at around plus 3bp-4bp versus around minus 5bp-6bp previously.

“It would be very challenging now for French issuers to apply a 2bp-3bp premium and assume they would be able to price around the minus 7bp-8bp number,” he said. “Obviously for the likes of Portugal, Spain and Italy, those differentials have gone wider as well.

“We’re still not quite at the all-time wide that we saw at the end of last year, but it is significant.”

Meanwhile, some bankers expressed their hope that an expected euro benchmark issue from Yorkshire Building Society, which will begin a European roadshow next week, will demonstrate that demand remains for non-German paper.

“If we see something successful that isn’t just another tight German Pfandbrief, then that would be good for the market,” said one.