March pick-up hoped for as Covid-19 stymies Feb supply
Syndicate bankers expect euro benchmark covered bond supply to re-emerge upon more stable market conditions in March, citing the resilience of the asset class, after issuance dropped off sharply in the second half of February on the back of rising concerns over the coronavirus.
Ten deals totalling €8.75bn hit the market in February, but seven of these were launched in the first two weeks and only three thereafter, while year-to-date issuance of some €37bn is down around €10bn on the first two months of 2019.
“In comparison to January, we’ve witnessed a very pronounced cooling-off period,” said a syndicate banker.
The syndicate banker said investors had more or less had their pockets closed by the scare and that issuers, given the substantial volumes issued in January, were in no desperate need to launch a covered bond.
“If one side doesn’t move and the other doesn’t have to,” he added, “then there is no movement.”
Another said the magnitude of volatility across global markets felt “way different” from the geopolitical concerns of January, such as US-Iran tensions and China trade talks, which now seemed like “child’s play” in comparison.
“We’re still trying to find out what the impact of this will be,” he said, “and I think it’s still too early to make a call – there’s a lot of uncertainty over how the situation will unfold.”
He added that when comparing February’s issuance with other months, it was important to take into consideration the impact of the virus, and noted that recent new issues had been stable.
“There’s not been a lot of liquidity in secondaries,” he added, “ and it’s fair to assume covereds are trading a tad wider, as we’ve seen underperformance in other asset classes – particularly this week – so you cannot expect covereds to not be affected. I would be cautious with how secondary levels behave, but there’s a slight widening bias to be expected of 1bp to 2bp for most of them.”
Another syndicate banker said none of February’s new issues were bid tighter than re-offer.
Syndicate bankers agreed that despite the relative lack of recent new issuance in the past two weeks and mounting fears of a global pandemic, the covered bond market has remained healthy and that €8.75bn of euro benchmark supply for February was by no means mediocre.
“It’s still quite something,” said one, “so from that end, there’s no reason to be worried.”
He noted that two weeks ago there was little doubt that a €1.25bn 2030 print from ING Belgium would be successful and that ultimately it went “tremendously”, drawing over €3bn of demand.
“Fundamentally, this market is OK,” he added. “There are more buyers than sellers, and I’m sure the next issue that comes will be fairly successful.”
Another said that excluding a €1bn short 12 year from Crédit Agricole and a €750m 15 year from La Banque Postale, which both attracted modest levels of oversubscription, transactions had been successfully executed throughout the month and that this would likely continue in March.
“We remain cautiously optimistic on the asset class with all its technical support.” he said. “For the moment, it’s hard to see whether markets have priced in the coronavirus situation, but I expect it will be with us for some time, as it feels like the headlines are not getting better.”
He said that as soon as volatility begins to decrease, primary issuance will pick up, although he stressed it is difficult to say when such a window will emerge.
“You may not be able to tighten by a large amount of basis points,” he said, “but I’m pretty sure the demand will be there.
“Right now it’s about monitoring the market to find a suitable time,” he added.
A DCM banker said that low beta instruments such as covered bonds will be in pole position in any cautious reopening of the primary market.
And a syndicate banker said the current lull in issuance, coupled with a widening in swap spreads over the past few days, could ultimately prove positive for the market.
“All in all,” he said, “the relief in swap spreads should make covered bonds more attractive, especially non-Eurozone covered bonds. It’s becoming more and more attractive by the day.
“But ultimately, it comes down to whether issuers and in dire need of funding, which at the moment, I don’t think they are.”