February’s primary market picked up where January’s left off yesterday (Thursday), as Belfius sold a €500m seven year mortgage Pandbrieven with no new issue premium after better than expected conditions contributed to historically high euro benchmark supply in the first month of the year.

The Belgian issuer had the primary market to itself and leads BBVA, Belfius, Commerzbank, Erste, Natixis and NordLB were able to tighten pricing from the mid-swaps plus 46bp area to 38bp on the back of a peak book of some €2.2bn and final book above €1.9bn. The pricing was seen as flat to arguably inside fair value.

“We believe this was an incredibly strong trade and no doubt a good indication for more to come,” said Rabobank analysts.

Indeed, syndicate bankers expect February to maintain the favourable conditions that supported euro benchmark supply of €41.35bn* last month, topping even the €39.7bn in the first month of 2023. Last month’s supply is almost a quarter of analysts’ average full-year forecast for 2023, around €170bn.

Comparison of new covered bond issuance (EUR bn)

Source: informa global markets, LBBW Research

LBBW analysts noted that some 94% of January supply came from within the Eurozone, with Canadian institutions, for example, yet to tap the euro market. They will exit blackouts at the end of this month, and a syndicate banker suggested non-Eurozone issuers will be keen to tap euros given the positive tone and the prospect of issuing in size at no extra cost.

LBBW senior investment analyst Karsten Ruehlmann also suggested that Spanish banks could resume issuance activities after their latest results as ECB transactions expire. Similarly, ING analysts estimate some €15.75bn of euro benchmark issuance in February, noting that the first quarter is expected to be active thanks to TLTRO repayments due in March.

January was notable for witnessing the first 10 year supply since June 2023 and ING financials sector strategist Marine Leleux highlighted that 28% of last month’s supply was in maturities of 10 years and longer, compared with only 12% in the first month of 2023, with a further 30% of January issuance in the seven to eight year bracket.

January covered bond supply distribution by maturity bucket

Source: ING

While the attractive spreads available on issuance at the long end was highlighted one syndicate banker as contributing to investor interest in long-dated supply, combined with a bullish interest rate backdrop, he noted that issuers have also profited from the reopening of 10s and longer, with the spreads being paid by French names, for example, having come in some 5bp during January.

Another syndicate banker said the overriding feeling at the end of the month was one of relief, given that many market participants had been nervous about how anticipated heavy supply across markets would be absorbed in January.

“The resilience of core European fixed income markets has been quite remarkable,” he said. “That shows the strength of demand there is, with a lot of liquidity chasing too little fixed income product, whether that be in SSAs or covereds.

*Includes a €750m three year FRN from Nordea Mortgage Bank