Potentially tricky political events – notably the upcoming US election – and issuers’ limited funding needs are expected to dampen covered bond issuance in the fourth quarter, although volumes are expected to pick up after what was the quietest third quarter since the onset of the financial crisis.

Only Eu16.1bn of euro-denominated benchmark supply was sold in the third quarter.

“This can be explained by a relatively busy first half of the year, while issuers seemed to have shifted focus on issuing capital instruments as well as senior unsecured paper,” said Joost Beaumont, senior fixed income strategist at ABN Amro. “Furthermore, recent adverse market conditions might have kept issuers side-lined.”

Maureen Schuller, head of financials research at ING, noted that last month’s supply was also unusually low.

“With only Eu5.3bn in euro benchmark covered bond debt printed, supply even fell short of the slowest primary month in the past decade – September 2008 when only Eu5.5bn in benchmark covered bond debt was printed in the wake of the bankruptcy of Lehman Brothers,” she said.

Schuller also noted that since May euro benchmark supply has not surpassed Eu10bn in a month, with issuance of around Eu5bn in four of the last five months.

“Hence, while half way through the year total euro benchmark supply was over Eu30bn ahead of last year’s issuance, it is now almost running flat with last year’s supply figure,” she said.

Schuller said that ING’s estimate for 2016 euro benchmark supply of Eu140bn now looks high. Year-to-date euro supply now stands at some Eu108.5bn.

“To realise this number [Eu140bn] we need two consecutive months with at least Eu13bn on average in benchmark supply considering the typically slow supply in December,” she said. “For both months that would be above the past decade’s Eu11bn average.

“We nevertheless maintain our 2016 supply estimate for now. We do expect to see some pick-up in supply activity in October with Eu19.3bn in benchmark debt rolling off the curve, making October the heaviest redemption month this year.”

ABN Amro’s Beaumont said he is also sticking to his 2016 supply estimate, which would imply euro benchmark supply of Eu37bn in the final quarter.

“However, the risks are tilted to the downside,” he said.

Syndicate bankers also said that supply should pick up in the fourth quarter, but noted that a variety of events could interrupt supply.

“I’m optimistic about this quarter,” said one. “I would expect to see higher supply than Q3, with the market looking supportive and with issuers undertaking some pre-funding exercises for 2017.

“But you also have to be realistic, because with the elections in the US and Spain, the Italian referendum, possible policy decisions from the ECB and the Fed and who knows what else, there are many potential events that could close the markets. It’s not necessarily going to be an easy quarter.”

Another banker agreed.

“With the US election on 8 November, you don’t really want to be coming to the market around then,” he said. “And then, if you consider blackout periods and the fact that the market generally closes mid-December, issuers should probably come sooner rather than later.

“If people don’t start jumping in the window now, it doesn’t send a very good signal for issuance going forward up to Christmas.”

Syndicate bankers also noted that most issuers’ funding needs are limited, after a busy first half of the year, and said this will also mean that Q4 supply is moderated.

“Most issuers are now well positioned and don’t need to be jumping into a market they don’t think is optimal,” said one. “It could be quite a frustrating period, to be honest – while we’re sitting here our corporate colleagues are essentially getting a trade every day, but I think that’s just the way the market is developing at the moment.

“Last year in covereds we had a real flood of supply in the fourth quarter, which sent spreads back out to their widest levels of the year. Given issuers’ needs, we shouldn’t expect a repeat of that.”

Photo: US presidential candidate Donald Trump; Credit: Gage Skidmore