Increasing confidence that a Greek debt deal will be agreed this week is unlikely to prompt a reopening of the euro covered bond market just yet, bankers said today (Tuesday), but they added that a positive outcome could support new issuance as Q3 begins next week.

Syndicate officials acknowledged that market sentiment had improved to an extent as a deal between Greece and its creditors appeared more likely, after proposals from Greece were on Monday cited by negotiators as providing a basis for a resolution at further talks later this week.

However, bankers said it would still be premature for an issuer to attempt to enter the euro covered bond market.

“Right now, a bad headline could come at any moment and you’d be forced to pull your trade,” said one. “It just wouldn’t make sense to go when the execution risk is still so high.”

He said that although ABN Amro launched the week’s first euro FIG benchmark today, a Eu1.5bn 10 year non-call five Tier 2 issue, covered bond issuers could not take much encouragement from the deal, which he saw as offering a new issue premium of as much as 50bp.

“That’s what it takes in this market,” he said, “and after that trade, I don’t think there’s much room for any FIG issuance, be it senior, subordinated, or covered.”

Other bankers agreed, stating that they did not expect any new issuance this week, but were optimistic that the market could reopen next week with the start of the new quarter.

“Right now, everyone is just aggressively screen watching,” said one. “Nothing is happening covered-wise and that isn’t likely to change this week.

“However, if a solution is reached this week we could, temporarily at least, enjoy a happier market from Monday, and issuers that have been waiting for so long will look to take advantage of that.”

One banker said that it would still be possible to launch a deal even in current market conditions, if it came from a core name, had a maturity of five years or shorter, and offered a 5bp-10bp new issue premium.

“You could do a Eu1bn trade, or a Eu500m no-grow for a smaller name, no problem,” he said. “We have all this uncertainty and this volatility in rates, but right now the market is so undersupplied that if you are paying the right price, you will find enough investors.”

However, he said it would make sense for issuers to wait until Q3.

“If you’re an issuer and you have already held off doing a deal for so long, then why not wait just a few days for the new quarter – when investors might be more willing to take on new risk – and maybe even a resolution to this Greek drama?” he said.

“But I am very optimistic with regards to more business being done in July.”

Meanwhile, bankers noted that while strong tightening was observed in other markets yesterday, covered bond spreads barely reacted, something they said reflected the view that the asset class looks expensive to government bonds and other markets.

“Much like the recent widening, the covered market is decoupled from this tightening,” said one.

Another banker said that of the last 30 new issues launched, only five are today trading tighter than re-offer, each of them German Pfandbriefe.

“It still gives the impression of a weak market,” he added.

Photo: Greek prime minister Alexis Tsipras after yesterday’s EU summit; Photo: EC