LBBW is set to launch the first benchmark euro covered bond of 2016 tomorrow (Tuesday), having announced a four year Pfandbrief today, and Lloyds is expected with a sterling FRN, but bankers anticipate relatively limited January supply after a weak market open and high volumes last quarter.

After a volatile overnight session in Asia, syndicate officials said the broader euro market looked soft today, with European equities down 3% this morning and Bunds rallying.

“It’s not the start we wanted,” said one syndicate official. “With this negative news from China, today is a bit more volatile than one would have hoped for on the first session of the year.”

In spite of the volatility, Landesbank Baden-Württemberg (LBBW) announced the mandate for its euro-denominated four year mortgage Pfandbrief this afternoon, with leads Crédit Agricole, ING, LBBW, Lloyds Bank and UniCredit. The deal will likely be brought to market tomorrow, according to a syndicate official at one of the leads.

“Obviously the broader risk market started on the back-foot today, but all the leads were in agreement that conditions will not be detrimental to this kind of product,” the lead syndicate official said. “There will of course be some questions over the price and how much premium is required, and we will show some leadership here, but the feedback we have received has been positive.”

The lead syndicate official saw German Pfandbriefe dated between November 2019 and October 2020 quoted at minus 13bp-12bp, mid.

Some syndicate officials said that other issuers were today assessing the market ahead of potential covered bond issues, including other German names. However, they said that euro supply would likely be limited this week given market conditions and a narrow execution window, because of public holidays in Germany and other European countries on Wednesday.

“The discussions are starting now, but given overall market conditions, no-one is in a real rush,” said a syndicate official. “It is not the most inspiring of environments and I would expect an unspectacular start for covered bonds this year.

“We will no doubt have a fairly busy January, as we always have a fairly busy January, but I cannot feel much true enthusiasm.”

Other syndicate officials agreed, expecting issuers to focus on senior and capital trades this month and noting that many launched covered bonds at the end of 2015 in order to avoid a potentially congested start to the year. Some Eu37.5bn of euro benchmark supply was launched in Q4 2015.

“All things being equal, there will be some covered bond supply in the coming weeks, but I don’t think there will be a huge amount,” said one. “Many banks carried out pre-funding exercises in the last quarter, with a view to getting their deals done while the SSA guys were out of the market, and now those players are back I suspect we will not see a huge rush of covered supply.

“Overall, the volume will be light compared to what we have seen in previous years.”

Syndicate officials said they expect most January euro supply to come from core jurisdictions, with French and German banks considered the most likely candidates, while Nordic banks have only a limited window as many are set to enter blackout periods.

The syndicate officials added that peripheral issuers would likely wait for better market conditions, with supply from Spain particularly unlikely because of uncertainty following inconclusive general elections in December.

Lloyds is also expected tomorrow, with a sterling-denominated three year FRN, having announced the deal this afternoon. Barclays, HSBC, Lloyds and RBC have the mandate.

Syndicate officials said they expect other issuers to tap the sterling covered bond market this week, including other UK issuers, given the conditions in the euro market and the holidays on the continent.

“I expect most of the deals this week could well come from the sterling market,” said one. “When the euro market is looking like it is, it is sensible to go for the safer niche currencies, and – if you can do them – in covereds sterling is the obvious choice.”

The last sizable sterling covered bond was a £250m (Eu339m, Skr3.1bn) three year issue for SEB on 12 November.