Euro covered bond issuance is expected to rebound to Eu15bn-Eu20bn in March after supply this month disappointed, coming in at less than half of February 2016’s total, but political risks give cause for caution and the Dutch election could lead to a concentration of supply in the first half of the month.

Euro-denominated benchmark covered bond supply totalled Eu9.15bn this month, substantially below the Eu23.25bn issued in February 2016.

January saw the busiest opening to a year since 2012, with Eu26.05bn issued, but the modest February total means year-to-date issuance of Eu35.2bn trails the Eu47.5bn issued in the first two months of last year.

Such issuance is well short of many market participants’ expectations, with bankers and analysts having forecast Eu15bn-Eu20bn of February supply in total – although it tallies with a general belief that benchmark supply will this year fall below 2016’s total, or at best be in line.

“Issue activity is far too subdued for the time of year,” said Alfred Anner, senior covered bond analyst at BayernLB. “There was a noticeable drop in the pace of issues at the start of February – Eu9.1bn has been placed to date, which is disappointing, especially when measured against the volume of Eu23bn in the same month a year ago.”

A syndicate banker agreed.

“Not that Eu10bn is not healthy supply, but Eu15bn or so would have been more healthy and more in line with our expectations,” he said.

A slight market slowdown had been anticipated as a result of the peak of the European reporting season, which kept many issuers on the sidelines, but the slump proved more marked despite a receptive primary market, with deals from a range of jurisdictions being well received across the curve and bid-to-covers generally high even as spreads tightened.

Some syndicate bankers suggested the strength of the wider market was to blame for covered bonds finding less favour.

“In the covered bond corner we are all sitting around wondering what can explain this disappointing month and it is difficult to say,” he said, “but I think one explanation is that while the markets were good, many people pushed forward strategic bail-in-able or senior trades at the expense of covered bonds.”

Issuance is expected to pick up next month, with bankers and analysts again forecasting euro supply in the region of Eu15bn-Eu20bn.

Factors seen supporting such an increase in primary market activity include the probable preference of many issuers to frontload supply ahead of a potential debate about tapering of ECB QE and heavy redemptions in the next two months.

In March some Eu17bn of euro covered bonds will mature, according to analysts’ figures, followed by around Eu19bn in April, while this month a relatively low Eu9bn redeemed.

However, the potential for increased uncertainty and volatility on the back of European political risks – firstly the Dutch parliamentary election on 15 March, but also the French presidential election, which begins in April, and later elections elsewhere – means market participants remain cautious.

“I keep by optimism and hope for a good month, maybe with around Eu15bn of supply,” said a syndicate banker. “But the topics which may have caused the uncertainty this month are only coming closer, which could speak for another disappointing month.”

Bankers added that the timing of the Dutch election, in the middle of March, could lead to a frontloading of supply into the first half of the month.

BayernLB’s Anner also expects a recovery in the primary market, but warns of risks to the downside.

“If this revival, however, fails to materialise and, as has happened in the preceding weeks, political risks relating to the approaching elections in France, the Netherlands, Germany and possibly Italy continue to weigh on market sentiment – especially for issuers in the European peripheral countries of Spain, Italy, and partially France – then 2017 may prove the weakest year for issues in the last five,” he said.

Photo: Assorted right wing EU politicians, including Marine Le Pen and Geert Wilders; Copyright: EU/European Parliament