A summer break in issuance is providing welcome relief after the shocks of Covid-19, according to syndicate bankers, with QE generally giving comfort that the covered bond market will remain open come what may, even if dissenting voices suggest issuing sooner rather than later could prove wise.

A syndicate banker said it is unlikely many issuers will hasten to market in spite of several looming risks, including a second wave of Covid-19, deteriorating US/China relations, Brexit, and the November US election.

“The general view is that covered bonds are not going to be the most difficult product to place on the market even if there is some stress coming in the autumn,” he said.

Since the middle week of June when euro benchmark issuance hit its highest level since before the onset of the coronavirus crisis, subsequent deals from Eurozone issuers have typically achieved only modest tightening during execution and oversubscription levels, which the syndicate banker said made for a “pretty unexciting” market.

“It was a slightly different story for those offering some premium,” he added, “but the reception was lukewarm for the larger names, and this is an argument for letting the market close.”

While most issuers are unlikely to be unwilling to dip their toes into the market until at least mid-August, it is still possible there will be sporadic, opportunist deals in the next few weeks from riskier names, he added, from those seeking to capitalise on issuance on the basis of relative value versus underlying sovereign curves or a broader market view.

“Some will perhaps wonder if the market is going to be better or worse when we come back at the end of August,” he said, “so although I wouldn’t call late July or early August the best of issuance windows, a small handful of issuers could potentially look at the market.”

But a DCM banker said there could be greater risk in waiting until the Autumn window to issue covered bonds, given that many banks will invariably find their balance sheets impacted as they adjust to the post-Covid economy.

“It could be really ugly,” he said. “The economy may recover at some point, but it will look very different, with some banks simply being unable survive because their underlying credit has gone out the window.”

Although markets are relatively stable, volatility may increase before the summer ends, he added, and some issuers could therefore be pressed to seek funding as soon as possible while conditions are favourable.

“I’m pretty sure we’ll see some volatility when the bad numbers start hitting the fan,” he said, “and that goes not only for Europe, but for financial institutions all over the world.”

He also highlighted how higher SSA issuance than in recent years – as public bodies tackle the impact of Covid-19 – will also weigh on covered bond spreads, due to relative value considerations.

“If this is the downside,” he added, “then you cannot sit back and enjoy your summer all the way until the end of August or September, otherwise you might bitterly regret having done so.”

Another syndicate banker acknowledged this perspective, but said central bank support mechanisms are likely to prop up the market for the foreseeable future.

“There’s a lot of huge things coming up before the New Year,” he said, “including Brexit, the US and a lot of fears concerning a second wave, but it seems QE will have the upper hand.”

Another banker echoed this, saying the disconnection between the real economy and financial markets is illustrated every day, particularly in the continued strength of the equity market.

“It’s been astonishing,” he said, “and in the credit market the compression continues, whilst not too drastic, but this is a theme that will continue over the coming couple of weeks.”

The market backdrop is extremely constructive going into the summer break, he added.

“The capacity of bad news to hurt the market has vanished,” he said.