Following a historically slow start to 2021, covered bond analysts are reconsidering already-depressed forecasts for full-year euro benchmark supply, warning issuance could struggle to reach even the previous lowest forecast of €90bn unless the economic outlook changes more rapidly than expected.

Following January’s €12.75bn of euro benchmarks, February supply constituted only three transactions totalling €1.75bn – just 20% of the €8.75bn in February last year and 14% of the €12.605bn average for the month from 2016-2020.

According to BayernLB analysts, last month’s supply was a record low, even less than the post-Lehman February of 2009, while year-to-date issuance is the lowest in a decade.

At the end of the first two months of 2021, euro benchmark issuance stands at €14.5bn, 61% down on the €37bn issued in the first two months of last year, and 65% down on the €41.4bn average for the same period in the past five years.

The average forecast for 2021 euro benchmark supply among 14 analysts surveyed by The CBR in December was €107bn. The lowest forecast was €90bn, but the highest as much as €120bn-€125bn.

While some analysts said it would be premature to formally revise 2021 supply forecasts, most agreed the reduced issuance volume is hard to dismiss.

One analyst whose forecast was above the average said euro benchmark supply could be around 25% less than his initial forecast, and lower than the lowest previous forecast.

“I was too optimistic about the eagerness of banks to pay up to continue to issue in public format,” he said, “which they’re obviously not, as they’re going senior or taking TLTRO funding. The market is very central bank-driven and everyone just accepts it.

“Of course, you can never say never, but the higher estimates now seem super-unlikely.”

BayernLB: ‘Volume of previous years a long way off’

Source: Bloomberg, BayernLB

DZ analysts’ forecast of €90bn for 2021 euro benchmark issuance was the lowest of analysts surveyed at year-end and DZ analyst Thorsten Euler remains comfortable with the figure despite supply thus far being less than anticipated.

“We are OK with our forecast right now,” he said, “but if this low issuance trend continues through March and April, it will look increasingly difficult to achieve even the €90bn.”

Having already cut her forecast for 2021 euro benchmark supply from €110bn to €95bn in the wake of new TLTRO measures announced by the European Central Bank in December, Maureen Schuller, head of financials research, ING, now believes supply could struggle to reach €80bn if this year’s pace of issuance persists.

“Historically, it would be really unprecedented if we got anything below €90bn,” she said, “but then again, the extent to which banks can draw funds from the ECB is also unprecedented.”

However, she does not expect to revise her forecast until at least June, given that a number of variables could yet impact supply in the coming months, such as a rise in inflation expectations triggering wider spread levels, which could make covered bond issuance more favourable relative to the senior issuance many banks have leaned towards thus far this year.

“If markets start to expect that the central banks cannot maintain these accommodative policy measures,” said Schuller, “spreads may rise, particularly against a backdrop where NPLs are increasing. More issuers could then decide to make the switch to covered bonds, but there are still so many uncertainties.”

Rabobank analysts agree that the fundamental drivers of covered bond supply in 2021 will be determined by the development of the pandemic and how CBPP3 and TLTROs evolve. In this regard, they err on the cautious side.

The “vaccine euphoria” present towards the end of last year has passed, they noted, to be replaced by logistical difficulties associated with immunisation, making it increasingly apparent that economic recovery has been pushed back.

“These factors all but assure central bank policies to support the recovery will remain in place for the foreseeable future,” they added. “This in turn suggests that issuers’ choices in terms of publicly placed covered bond issuance will remain tainted by the influence of more economically viable options made available by central banks.”