The covered bond market needs a break in issuance for demand to rebuild, according to syndicate officials, after nine benchmark deals this week found varying degrees of success amid widening spreads, although SCBC is due early next week after mandating today (Friday).

September has been the heaviest month for euro benchmark supply in the covered bond market this year, with some Eu24bn of issuance.

This week nine new issues were brought to market, totalling Eu7bn and taking year-to-date supply over Eu100bn, to Eu106bn, according to Joost Beaumont, senior fixed income strategist at ABN Amro.

With oversubscription levels low and moves from initial price thoughts limited in many deals this week despite spreads appearing generous versus secondary levels and trades sold earlier in the year, bankers cited the quantity of supply as affecting investor appetite, while the iBoxx euro benchmark index was seen as widening some 6bp.

However, a selection of new issues were comfortably oversubscribed and found strong momentum, with syndicate officials noting those that performed the best were rarer names, such as ABN Amro and ING Belgium, and high quality core names that offered attractive positive spreads, as did Swedbank.

Other deals’ difficulties were largely attributed to the widening of spreads.

“In a widening environment, trickier deals like the peripherals typically have a harder time getting over the finish line,” said one. “By the same token, given how tight it is and in a spread widening environment, the very tightest of credits – like UniCredit AG – might struggle even with sensible new issue premiums.”

The syndicate official added that some issuers had also found lesser demand for reasons specific to their jurisdictions, such as Bawag PSK and Westpac NZ, with appetite for the former limited because of recent concerns over Austrian banks and the latter because investors are less familiar with New Zealand issuers.

“Every deal has its own story,” said the syndicate official. “It does not mean some issuers have been doing something right while others have been doing something wrong.”

Other syndicate officials agreed, adding that the market needed a break in issuance in order for demand to rebuild.

“I am hearing every day that there is sufficient liquidity out there, but in reality, given the fact there is huge new supply, the ECB purchase programme can easily be fed primary so there is no buying on the secondary market,” said one.

Given the sizeable new issue premiums offered by recent deals, the syndicate official said investors are being invited to switch out of secondary holdings.

“If you have an issuer paying plus 10bp, and the curve is plus 2bp, then it’s inviting,” he said. “So there is some selling activity also in the market, and the secondary trading is confronted with selling activity, and so the secondary spreads are widening – not dramatically, but still widening.

So because of lead managers’ approach of adding 10bp new issue premium onto secondary levels to get IPTs, he said, spreads on the primary are getting wider deal by deal.

“This makes investors concerned that the market is in the process of repricing and another recalibration,” he said. “Therefore, issuers have to pay up, and even with substantial new issue premiums we have books that are not so oversubscribed.”

Bankers noted that most of the publicly announced deals in the pipeline were executed this week and that some issuers will soon enter blackout periods, meaning that primary activity should slow, but they said they do not expect the hoped-for break in issuance to arrive next week.

Swedish Covered Bond Corporation (SCBC) this afternoon announced a mandate for a five year euro benchmark issue with leads BAML, Commerzbank, LBBW, Nordea and UBS.

The deal will be the SBAB subsidiary’s second euro benchmark covered bond of the year, following a Eu500m seven year in June.

A syndicate official at one of the leads said the deal will likely arrive next week, and added that Swedbank’s new issue on Tuesday showed that strong demand remained for Swedish paper in spite of the difficult market conditions (see separate article).

Other issuers are also eyeing the market ahead of potential deals next week, bankers said, including more Nordic names.

With Spanish elections this weekend and the quarter end approaching, market participants may have more clarity next week, a syndicate official said.

“But the market is still under pressure,” he said. “In covereds the main driver of that is the supply we have seen this month, and that needs to be digested before we can return to a normal market dynamic.

“The visible pipeline is now certainly smaller than it has been, and if issuance slows then it might be that investors reconsider putting their money to work, but if this trickle of deals continues it may be difficult for demand to rebuild.”

However, another syndicate official said this week’s results showed that issuers can still find demand at the right price in the meantime.

“Successful deals have been done,” he said, “and there are still successful deals to do.”