Volatile conditions and stresses in other markets will persuade issuers to focus their efforts in covered bonds this week, according to bankers, with euro supply expected to remain steady and investor participation in new issues to remain high in spite of public holidays in some jurisdictions.

Equities were this (Monday) morning down by 2%-2.5% across Europe, while the iTraxx senior financials index was out 15bp – the largest intraday percentage widening of the year, according to syndicate officials.

They said most issuers with deals to do are therefore this week likely to favour the covered bond market, where spreads are stable and after a string of encouraging deals were launched last week, with successive new issues from CaixaBank, BPCE, Swedbank, SEB and CM-CIC each attracting over Eu2bn of demand.

Only one euro benchmark senior unsecured bond was priced last week, a Eu2.5bn dual-tranche three and 15 year issue for Goldman Sachs on Thursday.

“While other markets are under stress, covered bonds look relatively straightforward to execute, and I’m sure a number of issuers will have deals on their radar for execution during the course of this week,” said a syndicate official. “The senior unsecured market looks open, but it seems costly in terms of premiums, which will keep covered bonds a viable alternative.”

The syndicate official said that new issue premiums in recent senior unsecured and corporate trades ranged from 10bp to 40bp, depending on the issuer, while most recent covered bond issues had offered around 5bp-7bp.

“You’re having to pay to play at the moment in senior unsecured, while covereds offer an easier, cheaper execution,” he said.

Another noted that deals were evident elsewhere, with BMW in the market today attracting Eu2.6bn of orders a dual-tranche, long four and six year euro issue, while Sampo Oyj had this morning mandated leads for a roadshow ahead of a potential euro benchmark.

“The BMW trade is a slightly different product, but if it’s a test of the senior market then it seems to have passed,” he said. “But again, that is offering a premium of around 10bp-15bp.

Syndicate officials said supply is likely to remain focussed in five to seven years this week, after each of the seven euro benchmarks sold last week came in that part of the curve.

“That’s where the best executability and the deepest demand is,” said one. “However, I do think the covered market is open across the curve.

“Of course you have to be cognisant of the swap rate, but I think a three year deal can still work for some names, and while the recent 10-15 year deals have underperformed on the secondary, there is still demand for that sort of paper, with a lot of insurance money out there.”

Syndicate officials added that the impact on supply of public holidays in some German regions this week, and of Chinese New Year, is expected to be limited.

“Parts of Germany will be back in the office tomorrow, and with BMW in the market today you can see it’s not a big issue,” said one. “I would expect activity to pick up as people return and I’d be very surprised if we don’t see some covered bonds tomorrow.”

Bankers added that after Eu8.25bn of euro benchmark supply last week, issuance is this month likely to surpass some Eu10.75bn sold last February and the Eu10bn that some market participants forecast for this month.

Photo: Cologne Carnival 2013; Source: MatthiasKabel/Wikimedia Commons