Covered bond execution is set to remain challenging next week, bankers said today (Friday), with demand expected to remain subdued and selective in the face of a heavy pipeline, leading to calls for issuers to be realistic and flexible in their approach to the primary market.

Following the US Federal Reserve decision yesterday (Thursday) to hold rates, syndicate officials said market sentiment appears unchanged and suggested that anticipated new issues will likely perform similarly to deals launched early this week – with oversubscription levels low and moves from IPTs limited.

As anticipated, no new issuance was brought forward yesterday as market participants awaited the Fed’s announcement and the primary market remained untapped this morning as the impact of the decision was digested.

Syndicate officials noted that European equities were down 1% in early trade with credit indices following suit, senior 1.5bp wider and sub around 3bp wider, while covered bond spreads were unmoved.

“On the primary market side, we’re back to the status quo,” said a syndicate official. “People are still looking towards a Fed rate hike this year, whether it is at the next meeting in October or further down the road, so in euro markets we’re still in a similar situation to where we were at the start of the week.”

Another syndicate official agreed that the announcement did not have an immediate impact for issuers.

“The old saying that after the Fed is ahead of the Fed rings true, because things are only postponed,” he said. “The wider market has reacted slightly negatively, but then we were on a negative trend already this week.

“The market has not been very receptive for all kinds of asset classes and that did not really improve today.”

With six issuers having publicly announced mandates for euro benchmarks and more – from both core and peripheral jurisdictions – said to be eyeing the market, syndicate officials said next week could be even busier than this week, in spite of the recent uninspiring results.

However, given the size of the pipeline investors will remain selective, they said, with this weighing against the clarity provided by the Fed’s decision and the benefits of the brief break in issuance.

“There’s now less uncertainty in the very short term, which might help spark a bit of risk appetite among investors,” said one, “but the pipeline remains very large.”

Another syndicate official agreed, adding that execution next week would likely follow a similar pattern to this week’s new issues.

“The number of investors feeling the desire to get involved with new issues has been shrinking,” he said. “Will they now all return freshly and smelling of roses on Monday just because the Fed has left the rate unchanged?

“I don’t know but I doubt it, because this market remains oversupplied and there is no spread dynamics, and this leaves us with a rather limited number of potential buyers.”

Given the potential that a deal could even fail to reach full subscription if the market becomes particularly crowded, syndicate officials said issuers would have to be realistic.

“I would hope there is enough flexibility on the issuers’ side to not move if the market is not there,” said one. “Issuers need to acknowledge that there is less momentum in this market than we’re used to and be aware they cannot achieve the unachievable.”

Syndicate officials also noted that Greek elections on Sunday could yet affect market sentiment, but said participants were not overly concerned.

“It’s not something that issuers have discussed at great length,” said one. “Clearly the first thing people will do on Monday morning is assess the result and how it is affecting markets at the open, but assuming minimal impact then I think new issuance should open as early as Monday morning.”

Another syndicate official agreed.

“For the time being, issuers on the continent and in the UK are not interested,” he said. “For now, it is water down the Mediterranean.”

Of the issuers that have announced mandates ahead of potential euro deals, Caja Rural de Castilla La Mancha and BAWAG will conclude roadshows today, while SR Boligkreditt finished a tour on Wednesday and Westpac NZ on Tuesday of last week. Hypo Tirol and ING Belgium will be on the road until Wednesday (23 September), while dollar deals are also anticipated from South Korea’s Kookmin and KHFC.