Hopes for euro covered bond supply in August are modest, after unusually low issuance of just Eu2.25bn made this month the quietest of 2017. However, a clear window is expected to open at the end of the month, ahead of a potentially crucial ECB meeting and German elections.

Three euro benchmark covered bonds were brought to market in July – a Eu500m 10 year for Crédit Agricole, a Eu1.25bn tap of a January 2037 ABN Amro issue and, most recently, a Eu500m three year for HSH Nordbank on 11 July.

This compares with Eu4.85bn of benchmark issuance in July 2016, and makes July the quietest month in the euro market since December 2016, when there was just Eu1bn of issuance.

“Even by the usual summer standards, it has been a quiet month,” said a syndicate banker. “If you don’t include the ABN Amro tap, to have just Eu1bn in new supply is unusual.

“I don’t think this is overly concerning, though – it is the quiet season of what has been a relatively quiet year so far.”

Year-to-date euro benchmark issuance stands at Eu79.95bn, compared with Eu97.7bn in the same period last year.

The fall in supply this year has been attributed largely to the higher than expected take-up of the fourth and final tranche of second series of the ECB’s targeted longer-term refinancing operations (TLTRO II). In March, the ECB announced that it allocated Eu233.5bn to Eurozone banks – almost double the amount many market participants had expected.

“Thanks to that ECB money, many banks are packed with liquidity, so it is no surprise that few have chosen to come to the market in the middle of summer,” said another banker.

Euro issuance was also lower this month because some issuers opted for alternative markets. July saw the first US dollar and sterling benchmark supply in three and two months, respectively, with CIBC selling a $1.75bn five year issue on 20 July and a £525m five year on 10 July, while compatriot BMO sold a £800m three year on 11 July.

“Those currencies offered attractive funding levels compared to euros, and it no doubt helped that investors in those markets were playing to slightly different schedules,” said a syndicate banker.

Expectations for euro issuance in August are modest, with the traditional summer slowdown in full effect and many issuers yet to exit blackout periods.

Syndicate bankers said next month could nevertheless offer good windows for opportunistic issuers to get deals done ahead of anticipated spread widening and any increase in yields that could arise if the ECB – as is widely expected – announces a tapering of its QE purchases after its next governing council meeting, on 7 September. Many expect the euro market to therefore reopen near the end of August.

“With the calendar otherwise clear and with no clear political risks on the horizon, that would give issuers a good couple of weeks to fulfil any funding needs before the expected ECB announcement,” said a syndicate banker. “If they decide to wait until after the ECB, it may be some time before they come back to the market again, and spreads may look quite different.”

Bankers also noted this would allow issuers to access the market before the German federal elections on 24 September.

“It’s not something for issuers and other players to overly worry about, but I do think some people have been too quick to overlook the German election as having the potential to cause disruption,” said one.

Photo: European Parliament/Marc Dossman; Copyright: European Union 2017