Little to no euro benchmark issuance is expected until at least mid-August, as the market embarks upon a potentially longer than usual summer break, according to bankers, who attributed the extended recess to the unprecedented central bank refinancing options available this year.

A syndicate banker said the potentially longer than usual break will be welcomed by the market after an unsteady second quarter and could allow spreads to tighten marginally.

“Thanks to TLTRO, needs have been revised down massively, so I’m quite sure we won’t see anything come out before mid-August,” he said. “The ECB, however, will keep on buying on a regular basis in the secondary market, helping spreads go down further before things start up again.”

Another syndicate banker said the break could go on as far as mid to late-September.

“We’re heading for a very pronounced break,” he said. “Banks are extremely well-funded via deposits, ECB schemes and whatnot, so nobody is exactly pressed to do something.”

Sporadic issuance throughout the period is possible, he added, although this would be very limited.

“If someone feels like doing something on short notice, it will work very quickly and very well,” said the syndicate banker, “as this demand overhang is definitely still in place.”

However, he does not expect spreads to tighten further, noting that recent euro benchmarks – with the exception of a Kookmin Bank €500m five year launched on Wednesday and a Nationale-Nederlanden Bank €500m 10 year from 30 June – have not performed in the secondary market, and that spreads had returned to pre-Covid levels for most jurisdictions.

“All the others are hovering around re-offer, with bids being slightly wider than the original level,” he added, “clearly indicating that people are not willing to accept a further tightening – at least not at this stage.”

According to DZ Bank analysts, the iBoxx Euro Covered index has been trading at around 14bp, close to its 9bp level at the start of the year and down from a peak of 34bp in mid-April.

Covered bond swap spreads currently moving sideways

Source: Markit, DZ Bank Research

“Even if the interest of private investors seems to be waning against the background of the low swap spread level that has now been reached again,” they said today (Monday), “the impending ‘summer break’ on the primary market and the ongoing covered bond purchases by the ECB under its bond purchase programmes (CBPP3 and PEPP) should ensure that the risk of spread widening in the covered bond market in the coming weeks is low.”

With a French national holiday tomorrow (Tuesday), another syndicate banker said it feels as if the summer break has already started.

“A lot of issuers have done a lot of funding this year, coupled with the TLTRO,” he added, “so I reckon it’s going to be bits and pieces here and there for the next month or so.”

He noted that the dollar market is generally more open over the summer period, but highlighted that its typical issuers from Australia, Canada and Scandinavia are either already in blackout periods or soon to enter one.

Various geopolitical flashpoints – including US-China relations, Hong Kong. and the November US presidential election – have the potential to lead to broad volatility and spread widening across fixed income markets over the next few months, he added, but forecast that covered bond will likely remain steady.

“The US election could get quite spicy,” he said, “but even if it all does kick off, I can’t see covered bond spreads getting materially wider.”