Covered bond issuers may yet tap the market this week, according to bankers, with conditions deemed supportive after a rebound in European bank stocks today (Wednesday) led a rally in equities and with issuers set to prefer the safety of the asset class in a prevailing risk-off environment.

Volatility in the wider market, along with public holidays in China and some German regions, has kept primary covered bond market subdued this week, with no euro benchmark issuance emerging after Eu8.25bn of supply last week.

Syndicate officials said the wider market looked more supportive today, with equities up across Europe, reversing days of losses, led by an improvement in European bank stocks, which had suffered over disappointing results and concerns around Deutsche Bank and its ability to pay coupons on Additional Tier 1 (AT1) bonds.

However, Deutsche’s shares were up as much as 17% this morning, after reports suggested the German bank could launch a buyback of senior bonds.

“It’s promising to see green all across the screen, with European equities up across the indices,” said one syndicate official. “In particular, a lot of the disquiet has been around Deutsche, and the positive headlines there have helped and we’ve seen a bit of a bounce in bank stocks – with Deutsche stocks up 4.5% at the open and continuing to jump from there.

“Financials have been the key driver of European equities, so today things look brighter.”

Syndicate officials added that the iTraxx senior financials index was 13bp tighter today, retracing widening earlier in the week, while peripheral sovereign spreads had also tightened.

However, the only financial institutions issuer in the market today was Goldman Sachs, selling a two year euro FRN senior unsecured bond.

“It is a bit surprising to not see anyone else in the market, given that this is by some way the best day of the week so far,” said a syndicate official. “Covered bonds are the right product for this market, and I’m surprised that nothing is on screens.”

Other syndicate officials said that issuers might be hesitant, in spite of the market rally.

“The covered bond market is fine, and yes, other markets have rallied today,” said one. “But they have been in freefall for the past few days, so we perhaps need to see more stability before issuers test the waters.

“That said, I don’t think we need to see much more, and I think we could see a deal tomorrow.”

Another syndicate official said any new issues launched tomorrow or on Friday would likely be met with more modest demand than issuance last week, citing the softer market sentiment and public holidays, but agreed that covered bonds are still an option this week.

“Last week gave a very good impression, but if we actually have a deal, I would imagine this week will be softer,” he said. “However, a deal can be done.

“In such a risk-off environment, covered bonds are what people want to see. They offer more resilience, and much less suffering than we have seen in other asset classes in recent days.”

Syndicate officials added that testimony by Federal Reserve chair Janet Yellen to the House Financial Services Committee today could further calm market sentiment.

Bankers said the secondary market is constructive, with covered bond spreads having mostly remained stable during the recent period of volatility.

“Covered bond spreads have remained mostly unchanged in the past week and seem to be uncorrelated to the recent movements in govvies and credit markets,” said Cristina Costa, senior covered bond analyst at Société Générale.

A Eu500m 2023 Deutsche Bank SAE issue launched on 13 January has nevertheless been underperforming other recent cédulas, according to bankers. Whereas other Spanish new issues were today trading inside their re-offer spreads, the cédulas of Deutsche’s Spanish unit were seen at 74bp over mid-swaps, mid, having been re-offered at 70bp – although, in line with Deutsche’s equity performance, today’s level represents an improvement from recent wides.