Euro covered bond supply will slow in February, according to market participants, due to blackouts, low redemptions and a possible preference for the senior market, after the heaviest January since 2012. Issuance is expected to remain challenging, but a return of real money accounts has been deemed encouraging.

With Eu24.25bn of euro benchmark supply, this month has been the busiest January since 2012, when issuers sold Eu26.575bn. Analysts said benchmark supply also surpassed redemptions of around Eu22bn this month.

Syndicate officials said the high volume was especially notable given volatility in the wider market this month, which meant that issuance was focussed into windows, with no benchmark deals priced between 13 January and Thursday of last week (21 January).

“January is always busy, but this has been a long, interesting month, to say the least,” said a syndicate official. “With the worries about Asia, oil, stock markets and the like, zero yields in Europe, the ECB distorting spreads, it has not been easy.”

Syndicate officials that worked on this week’s deals, however, cited as a positive factor that real money investor participation in the covered bond market is increasing, after such accounts featured less prominently in order books earlier in the month.

“It’s clear to me that real money is back big time,” said one. “The first wave of supply is over, valuations are ‘cheap’, the market environment supports the safe haven covered market and Draghi’s comment from last Thursday probably has provided a game-changer in the belief the ECB would start tapering their involvement in the covered market.”

Bankers noted that a Eu1bn seven year issue for AIB yesterday had particularly benefitted from good real money demand. AIB leads Commerzbank, Goldman Sachs, UBS and UniCredit priced the Irish issue at 55bp, on the back of books of Eu1.6bn.

“We were very pleased with the transaction outcome,” said Chris Curley, co-head of term funding at Allied Irish Banks. “The strong demand in a large very high quality order book allowed pricing to tighten notably from IPTs and the final new issue premium compared favourably with recent deals executed in January.

“There was significant real money demand underlining the positive trajectory of the credit and relative value versus the sovereign.”

Asset managers bought 43% of AIB’s new issue, central banks and official institutions 34.3%, insurance companies and pension funds 14.5%, and banks 8.1%. Accounts from Germany and Austria were allocated 38.6%, the UK and Ireland 38.6%, the Nordics 9.3%, the Benelux 6.6%, Switzerland 2.8%, France 2.3%, and others 1.8%.

Analysts and syndicate officials said that euro benchmark supply will be more limited in February, with some analysts expecting around Eu10bn of supply. However, they said this would mean net supply is once again positive, seeing Eu9.2bn of redemptions next month.

They said this slowdown would reflect the lower redemptions and also that many issuers are entering or will enter blackout periods.

“The more subdued primary activity in the senior unsecured and subordinated markets furthermore illustrates that the heavier issuance in covered bonds is not so much driven by an on aggregate higher funding need and funding activity by banks,” added Maureen Schuller, head of financials research at ING. “This, in our view, makes the covered bond primary activity susceptible to a refocusing by issuers on senior unsecured or subordinated issuance.”

Syndicate officials said that some issuers may focus on the senior unsecured market next month, given that conditions in that market are improving.

“There will still be a steady stream of covereds, I’m sure, but consensus seems to be that the senior unsecured market is improving and that the issuance pattern will favour senior,” said one.

Syndicate officials also said that market conditions are likely to remain volatile, with issuance expected to remain window-based.

“Issuers will need to be nimble,” said one. “I’m not sure things are going to get any easier any time soon.”

South Korea’s Kookmin Bank yesterday sold the first benchmark US dollar covered bond of the year, a $500m (Eu460m, Won601tr) five year 144A issue.

Leads ANZ, BNP Paribas, Commerzbank and DBS opened books yesterday after the Asian open with initial price thoughts of the 100bp over mid-swaps area, before moving to guidance of the 95bp-97bp area, will price within range, after the US open. The spread was then set at 95bp, with the book closing at $800m.

Around half of the orders came from Asian accounts, according to a syndicate official at one of the leads.

The deal is Kookmin’s second legislative benchmark covered bond. Kookmin in October sold the first covered bond to be launched under dedicated South Korean legislation, a $500m five year issue. It had previously issued on a contractual basis.