Euro benchmark covered bond issuance of just €12.75bn this month makes it the slowest opening month of a year since 2009, contributing to spread compression across primary and secondary markets. An Argenta Spaarbank debut Pandbrieven is the only deal publicly in the pipeline.

The month’s euro benchmark supply of €12.75bn is €15bn less than the €27.75bn issued in January 2020 and the least in 12 years.

“We already indicated that even last year’s low €95bn in euro benchmark supply may ultimately prove tough to match in 2021,” said Maureen Schuller, head of financials sector strategy, ING. “And indeed, even though one hooded crow does not necessarily mean winter is coming, this month’s harbinger doesn’t look very promising for the rest of the year.”

The month’s issuance is equivalent to 12% of the around €107bn of issuance expected across the whole of 2021, and LBBW analyst Carl Sattler noted it is less than half the €26.6bn January average over the last decade.

“Despite the weak start to the year, we expect issuers to hit the market with little advance notice in the coming weeks,” he added. “However, issuing activity will probably continue to lag behind the previous year’s levels in the months ahead since central banks continue to offer attractive funding alternatives.”

Historical overview of January euro benchmark covered bond supply

Source: ING

Only two transactions were launched this week, a DZ Hyp €1bn long nine year and a Société Générale SFH €750m 10 year, both on Monday.

A syndicate banker said supply will remain subdued next week, with only one or two deals expected to hit the market.

“After next week,” he said, “everyone is polishing their guns to shoot, with the blackout periods behind them.”

He noted that although the broader market tone has weakened this week, covered bond spreads are in general holding up well.

“What was important this week was to see DZ Hyp and SG both pricing at plus 1bp,” he added, “meaning that French and German Pfandbriefe at around 10 years are almost at the same level. It will be interesting to see how spreads from different regions are now converging.”

Joost Beaumont, senior fixed income strategist, ABN Amro, highlighted that most covered bond spreads are slightly above the lowest levels reached last year before the outbreak of the pandemic.

“In the Eurozone,” he said, “spreads of Ireland are still 4bp wider, while this is 1.4bp for French covered bonds. In contrast, spreads of Italian and Portuguese covered bonds are already well below these levels.

“More generally,” he added, “we expect that the lack of supply, together with large redemptions, will continue to compress covered bond spreads in coming months.”

Argenta Spaarbank is the only issuer with a euro benchmark in the pipeline, the Belgian bank having on Tuesday begun a virtual roadshow for a debut covered bond, with a seven to 10 year maturity, which is expected early next week. Barclays, Belfius, LBBW and Natixis have the mandate.