Banks entered the euro market today (Tuesday) after the UK bank holiday yesterday, but eschewed negative-yielding covered bonds for positive-yielding products, and covered bond supply is deemed more likely next week, with the ECB governing council meeting on 12 September also anticipated.

Issuers such as HSBC France, ING, KBC and Svenska Handelsbanken approached the market with issuance ranging from senior preferred to Tier 2 this morning, but the euro covered bond market has remained dormant since Berlin Hyp last Tuesday ended the summer lull with a EUR1bn three year Pfandbrief returning a record minus 0.588%. Maureen Schuller, head of financials research at ING, noted that last week’s supply was down from EUR2.25bn in the corresponding week of 2018.

According to syndicate officials, further benchmark covered bond issuance is more likely next week, but could yet emerge in the next few days, with new mandates being developed.

“There are a couple in the pipeline with mandate announcements, some roadshows, so I think it can be expected to get busier next week,” said one, “but some are just getting back from holiday and getting accustomed to the new reality on the rates side, and they’re wondering what they can do.”

Syndicate bankers said that in light of the vast majority of covered bonds trading at negative yields, issuers’ clear preference has been for products further down the capital stack, such as senior non-preferred and Tier 2.

“People are just focusing on higher beta products at the moment because this is where the market is stronger,” one syndicate banker said.

Another syndicate banker blamed the lack of issuance on the negative yield environment.

“Senior bonds are much more interesting because there’s some yield on it,” he said. “If you have a covered bond, up to 10 years, there’s no yield.

“It’s very difficult to sell bonds with a negative yield.”

Although BHH’s third venture into negative-yielding territory last week was encouraging, said the syndicate banker, similar moves from other core issuers would be needed to stimulate supply and re-inject confidence into the market.

He said it is likely some market participants are awaiting the outcome of the ECB’s September meeting, when it is widely expected to announce renewed QE measures.

“It’s clearly what the market is anticipating and it’s already being priced in,” he added. “If a continuation of APP is indeed announced, maybe as an investor I’m just waiting for that confirmation before buying.

“From a niche issuer perspective, more QE would be another assurance that my deal will work in negative territory.”

ING’s Schuller noted that it is non-Eurozone issuers who have so far declared any interest in issuing, whose funding decisions are less likely to be affected by ECB actions, given that they have been ineligible for Eurosystem purchases.

Virgin Money began roadshowing its inaugural euro benchmark today, with lead managers BNP Paribas, HSBC, Natixis, NordLB and UniCredit. ASB Finance will begin a roadshow next Monday for an intermediate to long euro trade in either senior unsecured or covered bond format. Barclays, CBA and UBS are mandated. And in dollars, HSBC Canada began roadshowing a three year 144A/Reg S benchmark today.

Another syndicate banker said the looming ECB announcement is unlikely to be stifling market activity to any significant extent.

“It’s probably shuffling the cards between covered and senior, at least for the issuers who can be active in both formats,” he said.