A sell-off in rates on the back of ECB taper talk could complicate supply this week, and a Bank of Queensland lead said that although market conditions have not been a factor for the awaited debutant – as accounts are still carrying out credit work – they are raising questions over timing.

In a speech at an ECB forum in Portugal yesterday (Tuesday), president Mario Draghi said all signs now point to a strengthening and broadening recovery in the euro area economy, and that “deflationary forces have been replaced by reflationary ones”.

“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged,” said Draghi.

Although he insisted that any changes to the ECB’s stance would have to be made gradually, and that inflation dynamics remain “more muted that one would expect”, the comments were interpreted as hinting at a step towards the ECB tapering its QE.

This prompted a sell-off in government bonds, with the 10 year Bund yield rising more than 10bp to close at 0.37% on Tuesday and today fluctuating between 0.37% and 0.41%.

Syndicate bankers said the moderate rates volatility is contributing to a weakening of market conditions, and the only benchmark live in the financials space today was a Tier 2 US dollar issue for Swiss Re.

However, they are confident that covered bond deals can still be done in the primary market.

“To a certain extent, it is something to worry about, but to a certain extent, it isn’t,” said one. “If you’re a frequent issuer and if you’re willing to pay maybe slightly more new issue premium than normal, you’ll be fine.

“Draghi’s comments are probably the first step into the tapering process, which is expected to start post-summer. Does that have an immediate impact on the primary market? Not really, because people still have a lot of money, and if you bring a primary trade priced correctly then they will play.”

Another syndicate banker said that issuers might decide against entering the market this week should the sell-off persist.

“It’s far from ideal, especially at the end of the first half of the year,” he said. “You can understand why some issuers might be put off.”

The market is still waiting for a Eu500m five year covered bond for Bank of Queensland, which had been expected yesterday (Tuesday) after a mandate was announced for the debut issue on Monday, but was delayed as some investors required more time to assess the issuer. A syndicate banker at one of leads BNP Paribas, Commerzbank, ING, NAB and UBS said credit work was still ongoing, and that the softening of market conditions is not yet a factor in the deal’s postponement.

“That is not what happened today,” he said. “The main reason we haven’t moved forward is that a couple of the big accounts are still doing their credit work and are still getting credit lines and approvals in place.

“Tomorrow, if we are ready to move ahead and if we have the approvals in place, then the market conditions come into play as well. But in all fairness, I do wonder whether we would have done it today even if the accounts had been ready given the slightly weak backdrop.”

Kommunalkredit Austria is also in the pipeline with an awaited Eu300m social covered bond, having held a roadshow last week. The deal had been expected to be brought to market this week, but has not yet been officially announced.

Figures released on Monday show that settled and outstanding CBPP3 purchases increased Eu69m, from Eu222.768bn to Eu222.837bn, in the week to last Friday. Portfolio redemption figures released yesterday (Tuesday) afternoon show that around Eu1bn of CBPP3 holdings matured, implying gross purchases of around Eu1.069bn. This is in line with the Eu1.096bn purchased in the previous week and the average of some Eu1.050bn the programme has tended towards since the ECB’s monthly QE target was lowered to Eu60bn in April.

Two CBPP3-eligible deals settled last week, totalling Eu1bn of supply. Analysts estimated that the Eurosystem’s share amounted to Eu350m-Eu400m, implying that secondary market purchases averaged Eu133m-Eu144m per day last week. This is a slight increase from the estimated average secondary market purchases of some Eu90m-Eu100m per day in the previous week.

Maureen Schuller, head of financials research at ING, noted that the net increase of Eu69m, is the second lowest this year, after the final week of March.

She also noted that, on top of the Eu1bn of CBPP3 redemptions, Eu500m of covered bonds bought under the Eurosystem’s first two covered bond purchase programmes matured last week.