The Covered Bond Report

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Draghi holds fire until fall, but covered dynamics unchanged

The European Central Bank held off announcing a rate cut yesterday (Thursday), but raised expectations it will deliver a potentially broader stimulus package after the summer break, leaving the covered bond market’s supports – and challenges – in place.

While some market participants were left disappointed by the lack of either a rate cut or firmer policy plans, ECB president Mario Draghi offered dovish language and held out the prospect of announcing a wider package of measures – including new net asset purchases – after the governing council’s September meeting – sooner than some were anticipating. DZ Bank analysts, for example, described the overall signals from the central bank as “spectacular”.

A covered bond analyst said the outcome was more or less in line with her expectations.

“He opened the door to further action in September,” she said, “but the market might have expected a little bit more yesterday.”

The immediate reaction in government bond markets was volatile and mixed as the announcements were digested.

“Yesterday’s volatility was brief,” said a syndicate banker. “The medium term message to be taken home is that we are not going to run out of cash in the foreseeable future – this was the promise they made and I think many expect the next steps to happen in September.”

Bankers said that today (Friday) covered bonds were generally stable post-ECB.

“There were no major moves,” said another syndicate banker. “The trends remain the same. We’ve seen good performance in the secondary market, Italy and Spain are outperforming other regions – Italian covereds have benefited most from recent headlines and market moves.

“Otherwise, given the lack of new issue supply in the quieter period, we’ve seen a good performance in secondary markets.”

With yields expected to remain depressed in euros, issuers are expected to face the same “headache” as recently, according to a third syndicate banker.

“As an issuer you have to look at the swap rate – all but 10 years are in negative territory,” he said. “Of course there are trades in negative territory, but do you want to be the first to test the water now?

“I don’t think that’s prudent advice.”

This could, however, be a moot point, as syndicate bankers expect the European summer holiday season to keep issuance to a minimum in the coming weeks.

“Europe is sunbathing and/or sweating on every beach you can think of,” said one “and I don’t expect a lot to happen.”