A renewed and bigger sell-off in global equity markets and drop in the oil price put covered bond spreads under pressure today (Monday), with the primary market deemed shut for the immediate future and at the mercy of coronavirus developments, even if analysts saw positives amid the panic.

A syndicate banker said that after the sharp stock market falls today the market is essentially closed, as participants wait for the dust to settle.

Euro benchmarks from Commerzbank and Eika Boligkreditt last Tuesday and Thursday, respectively, were trading 5bp wider on the bid side, he said, but added that there is little value in looking at where bonds are being quoted and that no fundamental risks are posed to the quality of the asset class.

“Bid-ask spreads have widened from about 3bp to 6bp,” he said, “clearly indicating traders are not willing to trade on the prices they quote.”

Bankers said the plunge in government bond yields that accompanied the equity sell-off was more dramatic than any they had previously seen, as the 10 year Bund hit a low of around minus 0.90% in tandem with a surge in US Treasuries.

“It’s very difficult to see if any bottom to this can be found soon, as the market has been very much oversold,” said another syndicate banker. “Whether it’s another day or two until we see more stability, I do not know.”

He said he would not be surprised to see 10 year Bund yields fall further and breach the minus 1% mark in the very near future.

“The effect of the Fed easing by 50bp last week was very short-lived,” he said, “so this is something we need to take very seriously.

“Presently, issuers can do no more than monitor the market and highlight the broader strengths of the covered bond market in general,” he added. “In times like these, we see an increased desire for stable assets, so whenever we see some marginal stability returning, the covered bond market is the one to look at.”

Acknowledging that covered bond spreads were not unaffected by today’s volatility – although significantly less than other bank bond products – Maureen Schuller, head of financials research, ING, said covered bonds would remain relatively well supported by CBPP3, particularly if APP target volumes are increased.

“Markets may even start anticipating that current exceptional circumstances could prompt the ECB to look at preferred senior debt, too, for its purchase programme,” she added.

The syndicate banker also said the rally in German government bonds could help contain any spread widening.

“The pick-up versus Bunds will become more attractive in that sense,” he said, “although this will only be the case for select jurisdictions.”

DZ Bank covered bond analysts said they expect significant spread widening in the coming weeks in the covered bond market, with the primary market potentially seeing a renaissance of five to seven year issuance as investors prefer defensive maturities and with yields negative along the curve.

“As last week’s new issues show, the primary market remains open for new issues that offer some new issue premium,” they added. “At the same time, the coming weeks are likely to be characterized by periods without new issues.”

Long term, they were philosophical about the outlook, sticking to their full year 2020 issuance forecast of €135bn.

“The bottom line is that we expect spreads to return to a similar level in 12 months’ time as in February 2020,” they said. “Investors who would sleep for a year from now on might get the impression in March 2021 that not much has changed compared to the spread levels seen in February 2020.”