Euro issuance is in February expected to fall slightly from last month, which was the busiest January since 2012 with almost one fifth of this year’s anticipated supply, although as redemptions remain elevated and technicals supportive, bankers believe the market will remain plain sailing for most.

Euro benchmark covered bond supply totalled Eu26.05bn last month, slightly exceeding the Eu24.25bn sold in January 2016 and making it the busiest January since 2012, when issuance reached Eu26.575bn.

“Overall, it’s been a good month, with a mix of old and new faces in the market and almost everyone getting a deal to be pleased with, regardless of maturity or jurisdiction,” said a syndicate banker that had worked on many of January’s deals. “You always tend to have a good run of trades at the start of the year, but particularly in the first couple of weeks things went very well this time around.”

France was the most active jurisdiction, with Eu7bn of benchmark issuance, followed by Germany with Eu5.3bn. The two jurisdictions are expected to be the most active covered bond countries this year.

Almost all of the deals brought to market last month were deemed to have gone well, with the struggles of deals that attracted less demand – such as a CM-CIC Eu750m issue on Tuesday that fell short of the leads’ expected size of Eu1bn – attributed to idiosyncratic reasons, while supportive technicals, including high redemptions, made relatively plain sailing for most issuers.

Although analysts’ figures for January redemptions varied, most said that around Eu28bn of euro benchmark covered bonds came due, implying that net supply was slightly negative.

“However, the amount was Eu1bn higher than new issuance last year despite the fact that we expect total supply of euro benchmarks to decline this year compared to 2016,” said Joost Beaumont, senior fixed income strategist at ABN Amro.

January’s Eu26.05bn supply is over 20% of the Eu120bn-Eu125bn expected by many market participants this year.

This month is also expected to be busy, with a well-received Eu500m 4.5 year issue for Deutsche Pfandbriefbank yesterday (Wednesday) considered proof that conditions are still highly supportive.

Continuing blackout periods are expected to continue to be a drag on the pace of issuance, however, and many bankers and analysts forecast Eu15bn-Eu20bn of February supply in total. This compares with Eu22.75bn last February.

“Looking at the technicals, February will see less redemptions but they will still be relatively elevated,” said a syndicate banker. “Some 60% of total redemptions fall due in the first quarter, which is clearly supportive, while QE is still here to stay, and I’d be surprised to see any tapering discussions start as soon as February.

“With all that in mind, even though the market has lost some of its lustre, I maintain a positive stance regarding the short to medium term outlook for the covered bond market.”

Although redemptions in February and March are lower than in January, at Eu7bn and Eu18bn, respectively, bankers said they remain relatively high compared to the average across the year.

“With Dutch, French and German elections on the horizon, combined with geopolitical headlines given the political backdrop in the US and ongoing Brexit negotiations, we think issuers will prefer to frontload their issuance this year,” added Cristina Costa, senior covered bond analyst at Société Générale.

Some jurisdictions have been notable in their absence from the covered bond market so far this year, bankers said, with issuance from the periphery particularly low as only one benchmark – a Eu1.5bn 10 year cédulas for CaixaBank on 3 January – was sold last month.

Peripheral issuance is expected to remain low, despite strong spread performance and high redemptions, with some Italian issuers deemed unlikely to come to the market as concerns persist about the country’s banking sector, while other jurisdictions such as Australia may remain quiet as better arbitrage can be found in other currencies.

Spreads tightened throughout January across all jurisdictions, by around 4bp on average, and further performance is expected to be supported by the slowdown in the pace of new issuance.

“We keep waiting for the reversal,” said a syndicate banker, “but there’s no sign of one yet.”

Photo: Chinese New Year celebrations in Washington D.C. on Sunday; Credit: S Pakhrin/Flickr