The euro benchmark covered bond market finally succumbed to the traditional summer lull this week, with blackouts and central bank meetings combining with holidays to lead to a blank week, which syndicate bankers expect to be repeated in the coming fortnight.

A €1.5bn five year covered bond for Royal Bank of Canada issued on Tuesday of last week (18 July) looks set to have marked the end of pre-summer supply, with no euro benchmarks having hit the market this week and activity across fixed income markets having eased into the summer holidays.

“Years past have shown that mid-July marks the start of summer holiday for the primary market,” said LBBW senior investment analyst Rodger Rinke. “In the last five years, activity stood still no later than 18 July, the exception being last year with 25 July as the final transaction date until the end of summer.”

This expectation was echoed by syndicate bankers.

“Either our clients are in blackout about to release earnings,” said one, “or even the ones who have released already, like the Nordics, are mostly on vacation. I’d be extremely surprised if something comes to the market in the next two weeks.”

The week has also been punctuated by Federal Reserve and European Central Bank meetings yesterday (Wednesday) and today, respectively, with raising rates 25bp.

“The Fed is telling us what I think is a positive story,” said another syndicate banker, “namely that if we are not at the end of rate hikes, we are very close to the end, while the ECB is in a similar place, even if there are more to come.

“The market tone is good,” he added, “and if we continue to see good CPI numbers with inflation coming down, there is nothing that speaks against an early reopening of the market in mid-August.”

The post-summer reopening of the euro covered bond market has advanced in recent years from the typical resumption of activity previously seen at the end of August or beginning of September. Berlin Hyp was the first to announce deals after weeks-long hiatuses in 2021 and 2022, issuing on 17 and 16 August, respectively.

“Looking at past years, the next stop is probably Assumption (15 August),” said another banker, “so 16 August could be the first day of activity.”

After supply of some €143bn year-to-date, the pace of issuance is expected to ease post-summer, but Deutsche Bank strategist Bernd Volk, for example, still expects at least €40bn. He also noted that S&P last week sounded even more bullish on prospects for the sector in a midyear outlook published last week.

“S&P expects European banks will continue to issue significant amounts of wholesale debt in 2023 and 2024, with a further increase in covered bonds as banks seek to optimize funding costs,” said Volk, “In our view, ‘a further increase in covered bonds’ from historically high issuance levels YTD already seems challenging.

“However, given that S&P is typically in regular communication with banks due to its rating procedures and regular performance updates, the comment suggests that covered bond issuance is unlikely to collapse (assuming sufficient market absorption capacity and no follow-up bank funding facility to TLTRO introduced by the ECB).”

Photo: Fed chair Jerome Powell answers reporters’ questions at the FOMC press conference yesterday; Source: Federal Reserve/Flickr