No big surprises in TLTRO III, yields the immediate concern
Analysts are sticking to previous issuance forecasts after TLTRO III terms announced by the European Central Bank yesterday (Thursday) were close to expectations, but syndicate bankers have cautioned that the ECB’s dovish tone and negative yields could make life trickier for core issuers.
The details of TLTRO III had been awaited since ECB president Mario Draghi confirmed market expectations of a new round of targeted longer-term refinancing operations after the governing council’s 7 March meeting.
Yesterday he announced that the rate for the latest round of TLTROs could be as low as 10bp above the deposit rate (equating to minus 30bp currently) – some 10bp more expensive than under TLTRO II.
Analysts generally do not expect the terms to make a significant difference to how much covered bonds banks will issue.
“The terms make market funding a touch less competitive,” said one. “We see no impact on core issuance – they can issue at spreads almost flat to TLTRO III in longer maturities and have done a lot this year already. There is possibly some positive impact on the Spanish – the likes of Santander and BBVA could issue long dated cédulas at spreads that are not too far from the TLTRO III.
“Overall, it’s not enough to change my full-year forecast.”
With the TLTRO III details having little impact on market expectations, many market participants have focused on the dovish ECB exacerbating the low, negative yield environment with its “lower for even longer” stance.
Bernd Volk, strategist at Deutsche Bank, noted that 64% of the iBoxx EUR Covered index is now trading at a negative yield, double the 32% share at the turn of the year.
“In our view, given the increasingly high share of negative yielding covered bonds, supras and agencies, the sector has become increasingly challenging for real money investors,” he said.
A syndicate banker echoed this, noting that the seven year mid-swap rate in euros entered negative territory today (Friday).
“Will investors be forced into buying negative-yielding covered bonds?” he said. “Or will we see a spread correction?
“I don’t see underlying yields changing anytime soon and personally I think some spread widening is overdue.”
He noted that bank treasuries focused more on spreads would be less concerned with negative yields, but that he is advising core issuers to “go long or pay up” rather than attempt a negative-yielding trade.
Another syndicate banker suggested that if a negative-yielding benchmark does emerge, it will come from a core European name, possibly a Pfandbrief – as when Berlin Hyp in March 2016 sold the first negative-yielding benchmark euro covered bond, a EUR500m three year zero coupon deal.
A return to the dynamics of the CBPP3 era would be reinforced by expectations of a restart to QE – something some analysts are now envisaging, even if others are sceptical – or consider it, in the words of one, “madness”. The base case scenario of ABN Amro analysts, for example, is a restart of the asset purchase programme (APP), to be announced by year-end.
“If anything, the ECB’s commentary suggests that a new QE programme could be coupled with a rate cut,” said Joost Beaumont, senior fixed income strategist at the Dutch bank. “Together with ongoing reinvestments, this implies that the Eurosystem will remain a key player in the market for the time being, which should be supportive for spreads.”
Photo: ECB/Flickr