Covered bond issuance in the first quarter was some 30% higher than in 2018, even if the final week of the year proved bereft of benchmark supply. While macroeconomic and geopolitical concerns have returned to the fore, TLTRO III terms could be the most important determinant of Q2 supply.

“While it appeared last week as if the covered bond party was never going to end, this week has been comparatively quiet,” said LBBW senior investment analyst Karsten Ruhlmann yesterday (Thursday). “In the first four trading days of the current week, not one single covered bond benchmark issue was placed in the market.

“If tomorrow remains quiet, it will be the first week this year with no benchmark placement at all.”

Today (Friday) was indeed quiet, meaning that the only notable covered bond supply this week was a EUR300m five year sub-benchmark for Oma Savings Bank on Wednesday. This was in spite of market conditions remaining conducive to new issuance for much of the week, according to syndicate bankers, even if the mood was less boisterous after a volatile Monday.

March as a whole has represented a marked drop in the pace of issuance versus both the first and second months of the year and also March of recent years. According to SG figures, issuance in March has fallen year-on-year progressively for the past three years, although this year’s fall-off comes after a bumper January, and February issuance that was the highest in three years.

ABN Amro senior fixed income strategist Joost Beaumont highlighted the contrast between the beginning and end of the quarter.

“It is likely that issuers have shifted into a wait-and see mode awaiting the response of financial markets to the ongoing Brexit uncertainty as well as to the incoming weak economic data,” he said. “Indeed, the 10 year Bund has dropped to -0.015%, down from 0.181% at the start of March.

“Furthermore, the end of the quarter is probably also a factor as play, as issuers as well as investors start preparing for the reporting period.”

The slowdown this month did not prevent first quarter issuance this year reaching over EUR60bn, a 30% increase on the first three months of 2018, noted Beaumont.

At €62.1bn, ytd euro benchmark supply is up 30% y-o-y (EUR bn)

Source: SG

German and French issuers have contributed the biggest shares of year-to-date issuance, but their volumes are lower than in Q1 2018, with Canada and the Netherlands contributing significant amounts to rank after the core European jurisdictions.

Issuers from Belgium, Singapore, Ireland and Greece are yet to tap the market in 2019, noted SG’s analysts. The peripherals among them have been absent despite Italian issuers having taken advantage of receptive markets to sell some EUR4.6bn of benchmarks, only just short of the EUR4.75bn they raised in the whole of 2018, noted ABN Amro’s Beaumont.

SG’s analysts said that many investors are awaiting details of the ECB’s TLTRO III, which had at the turn of the year been identified by analysts as a potential key determinant of overall and notably peripheral covered bond issuance this year.

“Most of the investors we have spoken to over recent weeks are worried about Brexit implications, the low rate environment, geopolitics (European elections in May, US-China relations, etc), and low growth in Europe,” they added. “That said, most are neutral covered bonds as a segment (from underweight last year).

“Although spreads are tighter than at beginning of the year, they are still wider than in January 2018 and some jurisdictions (especially periphery, UK and non-EEA) offer a pick-up to EA core.”