US dollar and sterling supply is in 2018 expected to remain roughly stable versus this year, albeit with potential for higher issuance in both currencies from Canadian banks that have been less active this year, and in sterling from returning UK names, although Brexit volatility is deemed a risk.

This year $11.675bn (Eu9.94bn) of US dollar benchmark covered bonds were issued in 12 deals, down from $16.15bn in 2016. Some 44.5% by volume was issued by Canadian banks, with Norwegian issuers second, on 17.8%, and German issuers third, on 17.6%. Singaporean, South Korean and Swedish issuers made up the rest, contributing one deal each.

According to figures from Crédit Agricole analysts, some $44bn of US dollar covered bonds matured this year, implying negative net issuance of around $32bn.

Sterling benchmark covered bond supply totalled £11.1bn (Eu12.6bn), comprising 20 deals, up substantially from £5.95bn in 2016. UK issuers contributed 45%, Canadian issuers 27.5%, and Australian issuers 12.2%. Germans and Norwegians made up the balance.

Much of the sterling supply came in a late flourish of deals near the end of the year, when favourable basis swaps attracted international investors to the market and while domestic issuers Santander UK and TSB Bank – making its first appearance in the covered bond market – tapped the currency.

“We were surprised by the strong issuance from UK issuers, as they can also use the very attractive Term Funding Scheme (TFS) of the Bank of England,” says Frank Will, head of covered bond research at HSBC.

Net sterling supply was slightly positive, according to Crédit Agricole’s figures, given redemptions of around £10bn.

Analysts say both currencies will continue to play an important role in 2018, especially for non-Eurozone issuers that do not have the support of the ECB’s covered bond purchase programme. However, much will depend on the attractiveness of the funding levels on offer, they say.

“Cross-currency basis swap movements will be an important factor for issuance, and if yields remain low in the euro covered bond space, investors could be increasingly driven to covered bond markets in other currencies for yield pick-up,” says Cristina Costa, senior covered bond strategist at SG.

Costa expects $12bn of benchmark dollar covered bond issuance and £8bn of sterling issuance next year.

“Sterling supply should continue to be driven by domestic banks, but the larger investor base should attract German and Nordic issuers as well,” she says, adding that volatility in the sterling market could increase as Brexit negotiations advance next year.

“In the US dollar market, Canadian and Scandinavian issuers will continue to dominate the market, in our view,” says Costa. “That said, with three Singaporean and two Korean issuers, US dollar supply could increase.”

HSBC’s Will notes that Canadian banks had been significantly less active in the covered bond market this year than in 2016, having been a major issuer in both sterling in US dollars. However, he cites “a strong possibility” that a 4% issuance cap on Canadian covered bonds could be raised to 6% or 8%, boosting issuance from the country.

Expecting Canadian and Scandinavian banks to once again drive supply, Will forecasts slightly increased dollar supply of around $13bn-$15bn next year.

Sterling supply should continue to be driven primarily by domestic issuers, he says, noting that the Bank of England’s Term Funding Scheme will run out in February 2018.

“We think non-domestic banks are likely to be more opportunistic and focus on the cross-currency basis swap development,” he says. “Following the UK’s EU referendum result, volatility has come down this year and should, in our view, remain low for large parts of 2018, making the sterling market more attractive for domestic and non-domestic issuers and investors.

“However, as the Brexit deadline approaches in March 2019, volatility in the sterling market could rise again in the second half of 2018, dampening GBP supply.”

Will expects sterling supply of £8bn-£10bn.

Florian Eichert, head of covered bond and SSA research at Crédit Agricole, notes that Crédit Agricole interest rate strategists expect the EUR-USD basis to become less negative in 2018, which, he said, would make euro funding relatively more attractive in shorter maturities.

“However, should we get a weaker market in euros with spreads widening by a few basis points, the expected move in the currency basis could be offset and euro issuance from, for example, Australia or Canada could come in below our euro forecast,” he says.

Eichert expects $10bn-$12bn of dollar issuance next year, and said sterling issuance “will continue to be strong”, expecting UK issuers to become more active in the currency while noting that some German issuers still have natural needs for sterling funding to fill.

According to Crédit Agricole’s figures, $17bn of US dollar covered bonds will mature in 2018 and £10bn of sterling covered bonds.

Photo credit: Bank of England/Flickr