The euro market in January got off to its fastest start in seven years, with almost EUR28bn of supply. Issuance is expected to fall to EUR8bn-EUR10bn this month, even if conditions are expected to remain conducive, with rates volatility the only potential cloud on the horizon.

Euro benchmark covered bond supply totalled EUR27.9bn in January, including taps. This is up from EUR26.05bn in January of last year, and is the highest supply of any January since 2011, when supply reached EUR45.5bn.

“It’s been a very strong month,” said a syndicate banker. “Things got off to a good start, with LBBW printing the tightest ever benchmark on the very first day, and other issuers followed, getting many big deals away at increasingly attractive levels.

“January is always a happy season for the market, and this was once again the case.”

Syndicate bankers noted that an expected slowdown in the pace of supply in the final weeks of January hadn’t occurred.

“A look at the trading days also reveals comparatively buoyant issuance activity in the first few days of the year,” said Karsten Rühlmann, senior investment analyst at LBBW. “On 16 out of 22 possible trading days, benchmark covered bonds were placed in the market. In recent years, a higher level of activity was seen only in January 2011.”

Supply has already reached around a quarter of the EUR100bn-EUR110bn 2018 issuance forecast by most analysts at the end of last year. However, this is roughly in line with the issuance pattern of previous years. January 2017’s issuance accounted for just over 23% of the year’s total.

Given redemptions of around EUR17bn last month, net issuance totalled around EUR10bn.

France contributed the largest share of supply, with French issuers printing EUR6.25bn across seven tranches. The Netherlands contributed the second largest share by volume, EUR3.75bn across three deals, whereas Germany came third with EUR3.4bn across seven deals – with four German issuers having priced sub-benchmark taps.

Supply from the periphery surprised to the upside, with EUR2.25bn of issuance from Italy, comprising four tranches, EUR1.5bn from Spain, comprising two deals, and a EUR500m issue for Greece’s Alpha Bank.

Spreads tightened in most jurisdictions, with marginal widening of 1bp at most seen in France, Italy, Norway and the Netherlands. As at the end of the month, almost all January’s new issues had performed on the secondary market, with a handful seen trading at re-offer.

“If the story of the covered bond market in 2017 was that it was an issuer’s market, then the story of 2018 doesn’t look very different,” said one.

However, syndicate bankers noted that many deals had encountered greater price sensitivity from investors, and that on the whole most deals in January offered greater premiums than was paid at the end of last year – when many trades were priced flat to fair value.

So far, one euro benchmark covered bond has been issued in February, a EUR750m six year Pfandbrief for Helaba yesterday (Thursday), and the pipeline is clear of publicly announced deals.

Bank reporting periods are expected to moderate the pace of supply – with many issuers now in blackouts. Analysts and syndicate bankers therefore expect euro benchmark covered bond supply of EUR8bn-EUR10bn in February – in line with last February, when issuance totalled EUR9.15bn.

“EUR8bn would be quite a drop from last month, so I think it is more likely to be around EUR10bn,” said a syndicate banker, “but that range makes sense, given blackouts.”

If such forecasts are correct, net supply will remain positive this month, with analysts foreseeing EUR7bn-EUR8.2bn of redemptions, with France and Germany together contributing more than half.

Market conditions are consequently expected to remain conducive, and bankers see few headline risks – although Italian issuers are now considered likely to stay out of the market until after the country’s general election on 4 March.

However, some bankers suggested that should rates rise sharply and volatility increase – after a sustained rise in rates throughout January – conditions in the covered bond market could weaken.

“If we see the Bund going much higher and nothing happening to covered bond spreads, especially in Germany, we could see a correction,” said one. “I don’t think this is necessarily going to happen, but this is clearly the main thing people are looking at.

“With everyone thinking about the exit of the ECB, we are bound to see widening at some point in the market. The only question is when, and this could be a trigger.”