After a surprisingly slow finish to August, euro covered bond supply in September is expected to be more restrained than in previous years, thanks to issuers’ limited needs and appealing funding levels in alternative markets, with eight to 10 year issuance seen remaining “the name of the game”.

Some Eu5.5bn of euro benchmark covered bond supply was sold last month, across seven deals. Commerzbank was the first issuer in the market on 12 August, tapping a Eu750m July 2024 issue by Eu250m, before WL Bank on Monday of last week (22 August) reopened the market with the first new benchmark in a month, a Eu500m 10 year Pfandbrief. A further four new benchmarks followed and market participants said each showed issuance conditions to be highly supportive after the summer lull – with the long-dated deals comfortably oversubscribed while offering slim new issue premiums of around 3bp-4bp.

However, only one benchmark emerged this week, a Eu1.5bn 10 year for DNB Boligkreditt on Tuesday, and some market participants were surprised by the lack of activity, given that sentiment remained positive.

“After the encouraging results of last week and with the market still looking fine, I had expected a little more from this week,” said a banker. “Compared to last week it has been very quiet, and the action is mostly happening away from covereds.

“We’ll see if one or the other deal hits the market tomorrow, but it doesn’t seem likely.”

Instead, issuance this week has been focussed in other markets, and syndicate officials said that a series of recent deals had shown the strength of such alternatives – including a Eu1bn 10 year non-call five Tier 2 issue for Nordea with the first 1% coupon in the asset class and a Eu500m four year senior unsecured issue for Íslandsbanki that attracted the highest demand of any post-crisis Icelandic deal, both sold yesterday (Wednesday).

“All that on the last day of August, a month that will be remembered for its record-breaking primary activity and holiday-killer dynamics,” said Armin Peter, global head of debt syndicate at UBS. “Let’s hope we can carry that spirit – I mean the part of record-breaking, strong investor demand and market performance – into the new month of September.”

Bankers suggested that the volumes of euro covered bond issuance could be moderated this month by the availability cheaper funding alternatives, including the latest series of targeted longer term refinancing operations (TLTROs) offered by the ECB, but also the US dollar senior unsecured issuance.

Syndicate officials noted that the dollar senior market offered levels on a par with or even through those available on the euro covered bond market for some jurisdictions – with Nordic issuers’ recent three year senior FRNs in dollars seen as offering cheaper funding than three year euro covered bonds, for example.

“Given that and the sheer volume of activity in the first half of the year, I expect it to be a quieter September than usual in our market,” said a syndicate official. “This is an issuer’s market, and if an issuer does not want to issue, then there is no issue.”

Market participants said that issuance may also be interrupted by an ECB meeting next Thursday and an FOMC meeting on 21 September.

However, syndicate officials still expect issuance to emerge next week, and said issuers – including one peripheral bank – are monitoring the market.

Bankers also noted that ANZ New Zealand and Raiffeisenlandesbank Oberösterreich will next week begin roadshows ahead of potential euro benchmarks, while Natixis Pfandbriefbank is this week holding investor meetings ahead of a potential Eu250m mortgage Pfandbrief.

Bankers added that the majority of new deals will come in the long end, after all of the new euro benchmarks sold in August had maturities of 10 years or longer. Issuers and syndicate officials have since the market’s reopening cited the benefits of longer dated deals, which have enabled issuers to offer higher spreads and positive yields while the euro swap curve has been negative out to seven years.

“It will not necessarily be all deals, but with swap curves being negative to seven years and spreads super-expensive for most core jurisdictions, it looks likely that maturities of eight years or longer will continue to be the name of the game,” said a banker. “Those are the deals producing positive yields, and if you want to attract real money investors, the big buys are in positive yields – even if it is a slightly longer maturity.”

Some bankers said that the medium part of the curve is still open for higher beta credits, which would offer higher spreads and higher yields. They said it would make sense for peripheral issuers to target such maturities, as this is where the investor base is deepest.

“For these issuers, a 10 year could potentially be open, but their spread curve still has a natural shape – meaning spreads in five to seven years are lower than in eight to 10 years,” added a syndicate official. “For the super-expensive core jurisdictions, curves are flat or even inverted.

“It is probably easier to sell a 10 year Pfandbrief at minus 16bp than an eight year Pfandbrief at the same level, for example.”

However, another syndicate official said he would advise all issuers, including those from the periphery, to look to the long end.

“We have seen what works, and I don’t think it is worth the risk that you go for a shorter maturity and then get a weaker reception,” he said.

Of August’s new benchmark supply only one deal was not a 10 year – a Deutsche Bank Eu500m 12 year Pfandbrief on Wednesday of last week. Bankers said that the deal attracted notably less demand than the 10 year supply, and said this showed that the market for ultra-long issuance remains substantially smaller.

“We should not expect a wave of a super-long deals, as the natural investor base – insurance companies – are still looking for coupon-driven investments, and covereds are too expensive at current yield levels to be a real alternative in big size,” said a syndicate official. “Some ultra-long deals could work, but we saw with Deutsche’s 12 year that there is significantly less momentum behind deals longer than 10 years.”

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