UK covered bonds were indicated sharply wider this (Friday) morning after the UK voted to leave the EU in yesterday’s referendum, although some bankers saw glimmers of hope amid the wider volatility triggered by the result, with TLTRO II figures released today meanwhile offering a mixed picture.

UK covered bonds were said to have been quoted as much as 20bp wider at today’s open after a victory for the “Leave” campaign that surprised financial markets and triggered a record drop in sterling and falls of up to 10% in European equity markets. Indices subsequently retraced some of their losses, and UK covered bonds also tightened to trade some 10bp wider by around midday, according to bankers. They stressed that there had been no panic selling and few flows across any sectors.

“I’d take these levels with a big pinch of salt,” said one. “There are not necessarily trades going through at these numbers. People are trying to work out where things should be.”

Core covered bonds were said to be barely wider, with peripheral covered bonds retracing much of their early widening of an average of some 10bp or more.

A syndicate official nevertheless forecast that UK covered bonds are on course for a new position in the asset class.

“Nationwide is still tighter than Intesa,” he said, “but I wouldn’t be surprised if this crosses over in a couple of days, with the UK trading wider than peripherals. There is now quite a bit of risk embedded in UK names and no backstop bid from CBPP3.

“I assume that there will be a lot of credit departments cutting credit lines for UK names given the uncertainty. But it is not the end of the world.”

Indeed, another banker said that amid the wider volatility – in which senior unsecured, Tier 2 and AT1 paper widened much more – covered bonds could come to the fore.

“Maybe I’m being overly positive, but at the start of the year when markets were challenging covered bonds were one spot of light,” he noted.

Syndicate officials expect the primary market to remain closed in the immediate future to more fully digest the implications of the UK result – as well as a Spanish election on Sunday – but another said that he was also optimistic that a few deals could be executed before the summer lull takes hold.

Figures were released today showing take-up of the first of the European Central Bank’s second set of targeted longer-term refinancing operations (TLTRO II), and came in at the low end of expectations, at Eu399.3bn, with Eu367.9bn of this rolled over from the ECB’s first TLTROs. Market participants had suggested that a high take-up could contribute to lower covered bond issuance in the second half of the year.

“At first glance it is actually quite a small number,” said an analyst today. “Of course, there are more to follow, which could change the picture again, but the argument that banks may substitute TLTROs for senior or covered bonds is less strong and the impact on covered bond supply should be quite limited.”

But a banker noted that Italian banks, for example, had topped up their borrowings.

“They have taken a few billion more than expected so they are well funded,” he said, “and probably won’t go to the market for quite some time, so they should benefit from scarcity value as well as the support of the purchase programme.”