An anticipated slowdown in covered bond issuance in the fourth quarter is likely to leave 2015 net euro benchmark supply negative, analysts have forecast, despite almost Eu46bn of issuance having been brought to market in Q3 and September having been the busiest month since January 2012.

With September having seen some Eu24.25bn of supply, issuers sold Eu45.95bn of euro benchmark covered bonds in Q3 2015, compared with Eu41.5bn in Q1 and Eu19.25bn in Q2. Bankers noted that Q3 euro benchmark supply in 2015 was therefore around double the amounts raised over the same period in previous years.

Redemptions of around Eu25bn in Q3 resulted in positive net supply reaching around Eu21bn during the quarter. Year-to-date issuance of some Eu107bn means negative net supply of around Eu3bn-Eu5bn, noted analysts.

“September 2015 was the highest month in terms of primary issuance for covered bonds since January 2012,” said Jennifer Levy-Azran, senior analyst, covered bonds and agency markets, Natixis. “Year-to-date euro benchmark issuances reached Eu106.4bn, up 19% compared with the same period in 2014, and is the highest amount since 2011, the year when covered bond issuance peaked historically.”

However, foreseeing redemptions of between Eu32bn and Eu36bn in Q4 and noting that many issuers have completed their funding plans while some would soon enter blackout periods, analysts said that net supply over the whole year will likely be negative.

“Until the end of the year, Eu10bn-Eu15bn of fresh supply can be expected, meaning most negative net supply lies onward,” said Levy-Azran.

“This situation could ease the functioning of the primary market, which has been suffering lately as shown by the levels of the offered NIPs – often more than 10bp – as covered bond investors will be long cash, but it will depend on the capacity of issuers to keep investors interested and not let them go to other asset classes, as govvies could look attractive at some point.”

But despite expecting issuance to slow in Q4, analysts said it is more likely that 2015 supply will exceed rather than undershoot their forecasts – which generally ranged from Eu120bn-Eu130bn and were published at the start of the year.

“The risks to my forecast are clearly to the upside,” said Joost Beaumont, senior fixed income strategist at ABN Amro, noting market is still on track to meet his estimate of Eu125bn by year-end. “Looking at previous years, new issuance could well amount to Eu25bn-Eu30bn in Q4, which would bring gross supply at around Eu130bn-Eu135bn.”

Maureen Schuller, head of covered bond strategy at ING, also said supply this year is more likely to exceed her estimate of Eu120bn than fall short of it, noting that average Q4 issuance in the period 2009-2014 has been around Eu22.5bn, with Eu25.9bn printed in Q4 last year. When Q3 supply topped Eu40bn in 2009 and 2010, Q4 supply even reached Eu27.5bn, she added.

“However, the bank balance sheet declines we have seen since peak benchmark supply in 2011 and related lower funding needs makes the years 2009 and 2010 less comparable in my view – plus the fact that 2009 had a slow start of the year,” she said. “Hence my expectation is that the heavy issuance we have seen in Q3 2015 will contribute to below-average covered bond issuance activity in Q4 2015.

“Supply may exceed my estimate somewhat, but I don’t see it topping Eu130bn – which it would if we were to see similar Q4 supply activity to last year.”

Comparing their expectations and year-to-date data for specific jurisdictions, analysts at Danske said there might be more issuance to come out of Finland and Norway in particular, with full-year supply forecasts amounting to Eu5bn and Eu4.5bn versus Eu3.5bn and Eu2.5bn of year-to-date supply, respectively, for the two countries.

ING’s Schuller noted that the German euro benchmark market will grow this year for the first time in over a decade after a Eu500m five year issue from UniCredit AG last week took supply to some Eu20.75bn year-to-date, already exceeding Eu20.3bn in redemption payments, she said.

“A positive net issuance equation removes, in our view, one of the supporting factors to the traditional richness of Pfandbriefe,” she added.

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