A constructive tone to the market as reflected in successful senior Eurozone issuance today (Tuesday) and the performance of recent European covered bonds bode well for any issuer considering a euro benchmark, according to bankers, although they said these are few and far between.

No issuer elected to enter the primary covered bond market today (Tuesday), but a syndicate banker said the prospects for new issuance in the coming days are good given that conditions have improved markedly in comparison to recent weeks.

“This morning we were looking at a different market compared to last week,” he said. “The Fed and ECB have delivered, some of the dislocations in the front end of the curve have been resolved, and we’re now back into more of a buying mode – people have cash, they want to invest, and look into relative value.

“It’s still not an issuers’ market, but they can decide a bit more what they want to do now, which is good.”

Another syndicate banker echoed the constructive tone, noting that recent issuance has performed 2bp-4bp. He said that despite the lack of confirmed covered bond projects in the pipeline – with only one non-Eurozone name rumoured – the market can draw confidence from the latest European transactions, including Crédit Mutuel and CFF.

“I’m quite optimistic,” he said, “especially considering that senior deals this (Tuesday) morning went very, very well.”

Multiple-times oversubscribed books and decent price tightening on the senior Eurozone supply today indicated a slight uptick in market sentiment, agreed another syndicate banker, although he said the overall picture posed by the coronavirus pandemic has not changed.

“We are still waiting for this sentiment to trickle through to the covered bond world,” he added, “as for many, it’s still far too expensive, so they’re preferring the repo-with-the-ECB route.”

The first syndicate banker said that as well as the cost of a new euro benchmark, the focus on short to medium term maturities that has been in evidence in the past month’s supply is a deterrent for issuers.

“I’ve heard several say it’s almost a waste of collateral to issue a four or five year covered bond compared to just retaining them and getting cash,” he said. “But if the seven to 10 year bracket becomes more open at constructive spread levels, I expect more issuers to engage again.”

However, in the short term banks already being in or entering blackout periods will further constrain supply, while the impact of the economic contraction on lending is expected to lower funding needs going forward.

The last euro benchmark issuance was a Bank of Nova Scotia €1.25bn tap of a €750m March 2023 deal on Thursday that attracted some €1.7bn of orders at 55bp over mid-swaps. Although some market participants expressed concern at the implications of the eye-catchingly elevated level, syndicate bankers today said it should not affect non-Canadian prospects, with one also noting it had tightened around 5bp.

“They got away with a big size and this was probably their priority,” he added. “There’s been no repricing or widening of other jurisdictions to mention on the back of it.”

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