Syndicate bankers cautiously expect the pace of supply to increase next week after only a single euro benchmark hit the New Year market this week, with issuers preferring to opt for higher beta instruments in the current window given that covered bonds are expected to remain resilient.

On Tuesday, Aareal Bank launched the market reopener and only new euro benchmark this week, a €500m no-grow seven year mortgage Pfandbrief that was priced flat to slightly inside fair value and twice-subscribed.

The German issuer launched its last benchmark less than three months ago and, as Commerzbank analysts noted, Aareal is not a typical first-mover, with LBBW having reopened the market in four out of the past five years.

“This does not necessarily mean that the issuance pattern will be fundamentally different this year,” they said, “but it does seem to underline that the covered bond market is still far from its old form.”

A heavily front-loaded distribution of redemptions will support reasonably strong issuance for the remainder of January, suggested Commerzbank’s analysts, highlighting that until July euro benchmark redemptions are consistently above those of 2020, a picture reversed in the second half of the year.

“Therefore,” they said, “there should neither be a lack of cash on the investor side nor of refinancing needs on the issuer side.”

Aareal’s new issue has performed around 1bp after launch, according to Joost Beaumont, senior fixed income strategist, ABN Amro, demonstrating that reduced supply and support from the Eurosystem is maintaining downward pressure on spreads.

“Overall,” he added, “it also suggests that new issue conditions are rather favourable.”

Komerční banka is the only issuer with a mandated covered bond in the pipeline, having published the prospectus for a new programme on Tuesday and announced investor calls for an inaugural five year euro benchmark – the first euro benchmark from the Czech Republic.

Syndicate bankers told The CBR that while they expect euro benchmark activity to increase next week, the asset class will continue to be supported for the foreseeable future, meaning issuers have no major need to rush to the market before conducting higher beta trades.

“So far, we’ve only seen one covered and euro senior has felt a bit lethargic,” said one, “so it kind of feels like mid-January already. People don’t want predictable and boring, they want something with a bit of juice.

“Issuers know covereds are going to work well,” he added, “so they don’t want to move into a market busy with SSAs when they can wait a little bit.”

Overall covered bond supply will be comparable to last year rather than witnessing explosive growth, he suggested.

“Therefore, issuers are going to pick their moments.”

Another said it is difficult to predict which issuer is close to launching a covered bond given banks’ generally reduced funding requirements.

“I did hear through the grapevine of one name considering a deal,” he added, “so we should at least see something.”

Photo: Komerční banka, České Budějovice; Credit: Cheva/Wikimedia Commons