Euro benchmark covered bonds hit the ground running for 2020, with January’s €28.25bn of supply the second biggest start to a year, as the asset class shrugged off geopolitical concerns to allow for issuance in size at low NIPs, and syndicate bankers expect the good times to roll on.

Carl Sattler, investment analyst at LBBBW, noted that year-to-date issuance represents the second biggest start to a year in euro benchmark covered bonds, second only to the “blockbuster” January 2019.

Joost Beaumont, senior fixed income strategist, ABN Amro, noted that the month’s supply was down on last January by around 25%, but that the slowdown was mainly in the second half of the month.

“New supply was higher than in 2019 during the first few weeks of 2020,” he said. “This probably says more about last year’s new issue conditions, which improved significantly after a difficult first few weeks of 2019.

“However, this year, banks have also opted to issue more lower ranks of bank debt, which could have limited supply of covered bonds.”

A syndicate banker said that compared to the start last year, this year was saw decent trades launched from the outset.

“All transactions were successful,” he said, “with very low new issue premiums across a range of tenors.”

Indeed, SG analysts noted that new issue concessions tend to be higher in the first weeks of the year given the seasonal flurry of supply – and were around 4bp-6bp in January 2019 – but were mostly zero to 1bp this month.

France contributed the largest share of euro benchmark supply, with French issuers printing €7bn across five deals. German issuers contributed the second largest share by volume, printing €6.5bn of Pfandbriefe across eight tranches, while non-CBPP3-eligible Canada came third, with €3bn across two deals.

€2.25bn of euro supply came from the periphery, comprising a €1.25bn dual-tranche Italian issue and a €1bn deal from Spain.

“The sheer size of activity has been remarkable,” said a syndicate banker, “with so many trades a week, and all of them getting digested well irrespective of whether they came from Germany, France, the Netherlands or Canada – you name it – they all did well, and did so swiftly.

“Not a single transaction looked as if it might become a failure, so this is definitely an issuer’s market. It’s all smiles on their end.”

He said that as a result of this, in January investors had to settle for very low to no new issue premiums, creating an “odd combination” of low yields and low spreads at the same time.

“This is just what the covered bond world is like right now,” he said, “and I don’t see this changing for the foreseeable future.”

However, although low on an historic basis, for most of the month yields were higher than much of the second half of 2019.

“Although we do not see what could bring spreads considerably wider,” said SG analysts, “plunging yields in the asset class could tilt the balance of power back in favour of investors.”

Syndicate bankers noted the market’s mood had remained markedly positive throughout January in spite of a number of troubling geopolitical news stories, including, but not limited to, the US and Iran, the still-possible threat a no-deal Brexit, and a global health epidemic scare from the coronavirus.

“Name them all,” said one, “but nobody cares. It’s all still doing fine.”

Another said he expects the supportive tone for the asset class to continue.

“Nothing can stop this covered bond-making machine,” he said. “It has turned into a predominantly cash-driven galaxy of its own kind.

“Liquidity is there in abundance, hence whatever happens in the real world seems to be no obstacle to selling a covered.”

He said that the market would remain receptive in February, though a “cooling off” period will likely ensue before a second full-blown wave of issuance begins as the month progresses towards March.

“We’ll see one trade or another,” he said, “but nothing like this four or five a day pattern – this is done – though the market has undoubtedly proved it can cope with it.”

Photo: UK prime minister Boris Johnson signing the official Withdrawal Agreement with the EU; Credit: Andrew Parsons/No 10 Downing Street/Flickr