September’s surge in covered bond issuance has led some analysts to partly reverse pre-summer cuts to full-year forecasts. However, with the supply coming in a diverse range of jurisdictions, maturities and formats, analysts see no overarching reason for the unexpected volumes.

With supply of €20.8bn, September overtook January – which saw €12.8bn – as the month with the highest euro benchmark issuance this year. According to Florian Eichert, head of covered bond research at Crédit Agricole, September volumes have only outstripped those of the first month of the year twice in the past 15 years, in 2009 and 2015, while it was the busiest September since 2015.

The surprise activity has left analysts having to revisit full-year 2021 forecasts that in many cases had been revised downwards earlier this year. With supply having reached some €73bn as of Thursday (30 September), year-to-date euro benchmark issuance is just shy of the €75bn analysts were shifting forecasts towards ahead of the summer slowdown.

“Issuance this month has been everything the previous months in 2021 have not been – dynamic and diverse,” said Eichert, who adjusted his forecast up several billion.

Issuers from 13 countries hit the euro benchmark market, with maturities from five to 25 years, while the euro benchmark supply was supplemented by several diverse sub-benchmarks. Examples of inaugural issuance in September include the first euro benchmark from Italy’s Iccrea Banca, Achmea Bank’s inaugural soft bullet, and the first euro covered bond from Iceland, an Arion Bank sub-benchmark.

Another trend in the supply boom was issuance of green, social or sustainable covered bonds, in many cases for the first time. Since the market reopened post summer, there have been seven such covered bonds issued with a size of at least €250m.

Analysts said there was no obvious reason for the unanticipated level of activity.

“It definitely exceeded my expectations, also considering the primary market activity that we have seen for the rest of the year,” said Maureen Schuller, head of financials research, ING. “And to be absolutely honest, I didn’t see any good reason for this.”

One explanation she suggested was a rise in yields – the five year Bund, for example, backed up from minus 0.67% at the beginning of September to minus 0.55% at the end of the month – which contributed to shorter dated, five to seven year covered bonds being more appealing to investors.

“There have been other episodes – from April to June – where you had a similar rise in interest rates,” said Schuller, “but I think what is a bit different now is probably also the higher inflation expectations – there could be some sort of uncertainty as to what these would mean for monetary policy conditions and, related to this, what further moves we may see in underlying yield levels.”

She now expects issuance for the year of around €90bn, the middle of a €86bn and €94bn range where the lower end factors in supply similar to last year’s fourth quarter, and the upper end incorporates average fourth quarter supply over the past decade.

ING: September narrows the YTD primary gap versus 2020 to €10bn

Note: grey represents year-to-date supply; orange represents rest-of-year supply; Source: ING

Joost Beaumont, senior fixed income strategist, ABN Amro, attributed the flood of supply to benign market conditions and the lack of supply earlier in the year. He now thinks supply for the year of €80bn-€85bn is more likely, from a summer revised forecast of €77bn.

Beaumont also highlighted the issuance from non-Eurozone countries, such as Canada and Australia notable, noting they cannot access central bank funding like their EU peers. Issuance from such jurisdictions in both euros and other currencies contributed not only to bumper euro issuance, but in all-currency covered bond issuance hitting a record in September: according to Bernd Volk, Deutsche Bank head of covered bond research, this hit €31.3bn, beating a previous high of €30.6bn set in September 2010.

“Spreads of covered bonds held up remarkably well,” added Volk, “still providing an attractive pick-up to sovereigns and agencies.”

Indeed, the heavy supply was matched by heavy demand, as noted by DZ covered bond analyst Jörg Homey. According to Homey, subscription ratios rose from 1.5 times in mid-May to July to 2.5 times from mid-August into September, despite new issue premiums falling from 2bp-4bp to typically 2bp or less.

Analysts also highlighted that the high level of covered bond activity did not supplant bank issuance in other formats, which was also brisk.

TLTROs have been a key driver of the overall limited covered bond supply this year, and analysts see little in the ECB figures to suggest any change in this.

“One might be tempted to think that the wave of new issuance could be linked to the TLTRO repayments that were published last week,” said Ted Packmohr, head of financials and covered bond research at Commerzbank, after the latest figures on 23 September. “According to the ECB, banks have decided to repay early €79.2bn of TLTRO III loans for the first time this month.

“However, in relation to the total outstanding TLTRO volume of more than €2tr and taking into account new drawings possible this week, this figure does not seem substantial enough to us to serve as a justification for banks’ increased funding appetite.”

Packmohr sees December as a potentially key month for TLTROs and their impact.

“For one, because the year-end will show which institutions will qualify for the ECB’s second special interest rate,” he said, “for another, because we expect the central bank to announce an extension of its TLTRO programme into 2022 at its December meeting.

“To what degree this will come with adjusted conditions is likely to become a decisive factor for the covered bond market next year.”

In the meantime, market participants expect blackout periods to contribute to a slowdown in issuance over the coming weeks.