The decelerating flow of euro covered bond supply will likely be stemmed next week as markets await the result of the UK’s Thursday EU referendum, according to bankers, even while spreads remain resilient and yo-yoing market sentiment present workable windows.

Three issuers sold some Eu2.75bn of euro-denominated benchmark supply this week, in spite of a deterioration of conditions that surprised some market participants.

Sweden’s Stadshypotek on Monday sold a Eu1bn six year covered bond that, at the last book update, was only just subscribed, before French issuer Caffil on Tuesday attracted Eu1.3bn of orders for a Eu1bn nine year obligations foncières issue with the support of the ECB’s covered bond purchase programme.

BRFkredit then followed on Wednesday, pricing a Eu750m seven year covered bond on the back of over Eu1.1bn of demand, and bankers said the Danish issue was the week’s most convincing result, having benefitted from a brief bounce in market sentiment.

“In terms of oversubscription levels and premiums, sure, these deals look weaker than what came before,” said a syndicate official. “But I think some people are overlooking that these issuers all got funding done in difficult conditions, and ahead of what could be much worse conditions if the UK votes to leave.

“They’re not blowouts, but these are OK deals at low rates and tight spreads. These might start to look like pretty smart trades, if things go south.”

Most bankers said it is unlikely that any euro-denominated benchmark issuance will emerge before the UK referendum on EU membership on Thursday (23 June), and said issuers could also choose to remain on the sidelines until after the announcement of the take-up of a new series of TLTROs next Friday and a Spanish general election on the Sunday (26 June).

“Speaking to issuers and to my colleagues at other desks, it seems that everyone’s funding plans are well advanced, and no-one is so motivated or desperate for funding that they will need to enter the market in such an uncertain window,” said a syndicate official. “This week’s deals worked, but more and more accounts will be entering wait and see mode, so why take the risk?

“At least it means we can all sit back and enjoy the football.”

However, syndicate officials noted that market sentiment was once again more positive this morning, with European equities up 1.5% and senior credit indices 11bp tighter from yesterday, and some said that a repeat of this rebound could present opportunities.

“If we have some more mornings like this early next week, I think we could see one or two deals,” said one. “There is that risk factor that you can’t ignore, but I wouldn’t rule anything out.”

Another syndicate official cautioned against interpreting too much from the upturn.

“The market backdrop is yo-yoing every day,” he said. “After days of strong negativity, on Wednesday we had a relatively strong bounce and today we’ve had another – albeit on limited liquidity.

“But supply has died down in the last two days, and I think ahead of the vote it’d be unlikely to see anything more happening.”

Bankers also noted that covered bond spreads across jurisdictions have generally been resilient to the increasing uncertainty and market weakness of the last week, including the spreads of UK issuers.

They noted that UK names had, along with other jurisdictions, benefitted from a compression between non-Eurozone and Eurozone spreads over the last month, after poll results in previous weeks that indicated that the remain campaign held the lead had prompted some opportunistic buying.

“We saw a bit more doubt creep in this week, and it felt like investors were positioning themselves to be one the safe side, and we did see more sellers in UK covereds,” said one. “But spreads have more or less held where they were, except for some limited widening of 1bp-2bp in certain bonds.”

Syndicate officials saw recent 2021s from Lloyds, Abbey and Nationwide Building Society all trading in the high teens to low 20s, bid, today.

“These bonds, and those of peripheral jurisdictions, will probably come under more pressure as the vote nears,” said a banker. “But for now they’re doing OK.”

Photo: Prime minister David Cameron; Source: Georgina Coupe