Italian spreads have resisted uncertainty ahead of the country’s general election, but a peripheral name is said to have held off issuing this week and the outcome could yet deter OBG supply. The wider March outlook is unclear, after supply slightly undershot forecasts last month.

The most likely outcome of Sunday’s Italian election is widely deemed to be a hung parliament, which would then lead to negotiations to form a coalition government.

Market participants noted that despite such uncertainty, the Italian bond market has this year been the strongest performing bond market of all developed countries, and that Italian covered bonds have so far this year outperformed the Italian government.

Italian spreads have largely remained resilient in the run-up to the election, with covered bonds unmoved, while yields of Italian government bonds fell slightly this week. Indeed, on Tuesday, the Italian sovereign sold EUR7.7bn of bonds in a well-received auction.

Also on Sunday, the result of a vote of SPD members on the renewal of Germany’s coalition government will be announced. Polls suggest that a narrow majority will vote in favour of the “grand coalition”.

German bonds have also showed no signs of weakening in the run-up to the announcement, and Bund yields fell today.

“The markets show that investors are comfortable with both countries’ debt going into the weekend,” said a syndicate banker.

Bankers said that earlier this week one peripheral issuer had been monitoring the market and could have issued a euro benchmark covered bond, but no such deal emerged.

“I don’t think that I would have advised a peripheral issuer to come to the market this week, ahead of the Italian election,” said a syndicate banker. “I think it would have been difficult for anyone but the very top names.”

The last benchmark covered bond from the periphery came on 25 January – a EUR1bn five year issue for Greece’s Alpha Bank. Three Italian issuers tapped the market with benchmark deals in January – Crédit Agricole Cariparma, UBI Banca and Banco BPM.

“It will be good for Italian markets to have the vote out of the way, but if the vote just means more uncertainty, it may be some time before they return to the market,” said a syndicate banker.

Bankers are confident that next week will see continued covered bond supply, but unpredictable investor demand clouds outlooks for issuance in March.

Benchmark euro covered bond supply totalled EUR8.25bn in February. This is slightly below February 2017 supply, when issuers sold EUR9.15bn, and at the lower end of many market participants’ expectations, with some having forecast supply of EUR8bn-EUR10bn.

The first two weeks of the month saw only two benchmark deals launched, as primary markets were quietened by the sell-off and subsequent volatility in equity markets. However, covered bond spreads were unaffected and the primary market picked up, even though investors remained more selective than in previous months.

“Covered bonds showed their worth as the wet weather instrument last month,” said a syndicate banker. “Markets have been unpredictable – even in the covered bond space – but in that environment no deal has truly come close to failure.”

Following a EUR750m issue for KBC Bank yesterday (Thursday), year-to-date euro covered bond issuance stands at EUR 36.9bn, compared to EUR36.7bn by 2 March 2017.

However, given redemptions of around EUR7bn-EUR8bn, net issuance was roughly flat last month and remains positive year-to-date, by around EUR11bn, in contrast to 2017. Net issuance is expected to be positive this year for the first time in three years.

German issuers were the most active in February, providing EUR2.25bn of supply (27% of the total) across four benchmark deals.

Nordic issuers were also prominent, with Nordea Mortgage Bank printing EUR2bn (24%) in a dual-tranche trade and Norwegian issuers providing EUR1bn of supply across two deals. Sweden, France, the Netherlands and Singapore provided one benchmark deal apiece.

Photo: Piazza della Repubblica, Rome; Credit: Stefano Avolio via Flickr