A first quarter surge in euro covered bond issuance has prompted some analysts to increase their supply forecasts for 2016, but others are sticking to their guns, with the potential impact of TLTROs and an increase in senior and subordinated issuance among moderating factors cited.

Forecasts from a dozen published at the end of last year for 2016 euro-denominated benchmark covered bond supply ranged from Eu125bn to Eu160bn for the year, with the majority expecting supply of between Eu145bn and Eu155bn.

Year-to-date euro benchmark supply stands at Eu64.35bn, up from some Eu40bn over the same period last year. Analysts noted that first quarter issuance has been higher in only 2006, 2010 and 2011, and some have revised their forecast after the heavy supply and unforeseen market developments.

BBVA analysts have raised their supply forecast from Eu150bn to Eu170bn, citing stabilising and growing mortgage markets in core Europe and the Nordics, decreasing private placements, and potentially lower senior and subordinated supply as among the factors supporting increased benchmark covered bond supply.

“Although we expect some supply moderation, as better conditions for higher beta products overall could see some issuers favouring the senior unsecured and subordinated markets, we expect supportive supply conditions to continue throughout 2016,” said Agustín Martín, head of European credit research for BBVA.

The ECB on 10 March announced a new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, to be conducted quarterly from June 2016 to March 2017. The ECB said borrowing conditions in these operations can be as low as the interest rate on the deposit facility, which was, also on 10 March, decreased by 10bp to minus 0.40%.

Some bankers said the availability of the TLTROs will likely reduce covered bond supply from Eurozone issuers, because of the attractive levels on offer, depending on the exact conditions, which are yet to be announced.

Martín added that the potential disruption driven by TLTRO II will not have a significant impact on covered bond supply, as he believes it will only affect short tenor core covered bonds issued at negative yields, which he noted are a rarity. Only Berlin Hyp has issued such a benchmark, a Eu500m three year Pfandbrief sold above par on 8 March.

“TLTROs should have a greater impact on the unsecured senior supply, but as banks will have been given more clarity on MREL requirements by autumn, they will need to issue more senior unsecured or Tier 3 debt to comply with the bail-in requirements,” he said.

BayernLB analysts said issuance is likely to surpass the relatively low Eu125bn they forecast in November, but also expect the pace of supply to slow later in the year.

“The heavy new issue supply so far this year has definitely been surprising and changed our expectations slightly,” said Mara Schulz, covered bond analyst at BayernLB. “Nevertheless, the new issue supply shall be volatile as we still have ongoing risks – e.g. Brexit, Grexit, monetary policy, emerging markets, oil – which will affect the overall market sentiment and thus the covered bond market.”

Schulz said that BayernLB analysts expect issuers will not adjust substantially and expand their covered bond programmes, as they only expect moderate economic growth and moderate growth in credit demand.

“Issuers who have used the primary market already extensively will be seen less on the market during the rest of the year,” she said.

Some analysts, however, have decided not to revise their forecasts.

Analysts at ING last year forecast Eu140bn of supply, predicting that issuers would in 2016 refocus on senior unsecured and subordinated issuance.

After the busy start to the year, Maureen Schuller, head of financials research at ING, noted that within the past decade the ratio of supply in the final nine months of the year in comparison to the first three months of the year has in most years been around 2:1.

“If the final nine months of this year would match this mark we would see over Eu50bn more supply than our benchmark estimate of Eu140bn,” she said.

However, Schuller added that 2011 – the peak year in terms of Q1 euro benchmark supply – saw less supply in the final nine months of the year (around Eu91bn) than in the first three months (around Eu102bn) – with a ratio of 0.9:1. In 2010, when around Eu69bn in benchmark debt was printed in the first three months, the ratio was also lower than average, at 1.65:1.

Schuller said she expects the ratio of Q1 supply to supply in the rest of the year to be somewhere in between those of 2010 and 2011, which she noted would result in supply exceeding ING’s initial forecast.

“We nevertheless for now prefer to stick with our estimate,” she said. “We are just three months into the year and it has been a volatile period, particularly in February.

“But things have turned for the better since, and I think if market conditions remain stable then we will see the move I initially expected towards senior unsecured and bank capital issuance.”

Noting that non-Eurozone issuers have issued Eu50bn of benchmark covered bonds this year, up Eu8bn from the same period last year, Schuller said that the flow of non-Eurozone euro-denominated supply will also depend on developments in basis swaps.

“The euro dollar basis swap has widened most of this year, but in recent weeks the basis swap adjusted spread difference between dollar and euro issues has eventually also tipped in favour of dollar issuance” she said.

US dollar supply was limited at the start of the year, before Toronto-Dominion, National Australia Bank and Royal Bank of Canada sold three deals in the space of a week earlier this month, with bankers noting that the deals had come close to flat to where equivalent euro issues would have been priced.

Franz Rudolf, head of financials credit research at UniCredit, is also standing by his forecast of Eu130bn of supply.

“We actually feel quite comfortable with our overall Eu130bn supply forecast for euro-denominated benchmark covered bonds in 2016,” he said. “While we had not specifically anticipated the latest TLTRO announcement by the ECB – probably nobody had – we expected that there will be times and events that would prevent a smooth and gradual pro rata supply pattern in 2016.”

ING’s Schuller said the new TLTROs could dampen Eurozone covered bond supply to an extent later this year, while the other analyst said he expects the TLTROs to affect issuance in the maturity bracket up to five years to a certain degree, but said this will be partially compensated by non-Eurozone banks issuing in such maturities.