Euro benchmark covered bond issuance remains grounded, with a back-up in yields offering little boost to supply hopes despite the shortage of deals making conditions attractive, according to bankers, with the year’s new issues having ground tighter and higher yielding paper outperforming.

Only two euro benchmark covered bonds have been launched this month, an Argenta Spaarbank €500m 10 year on 2 February and a Caffil €750m 15 year last Monday (8 February). Aareal Bank meanwhile launched a $750m four year mortgage Pfandbrief on 3 February.

The €1.25bn of euro benchmark supply in the first two weeks of February is a fraction of the €4.75bn issued in the same period last year.

“For the time being the hoped-for resurgence in covered bond issuance remains just that, hope,” said Rabobank analysts. “For better or worse, central banks are in control.”

Post-earnings, the focus now is on senior preferred and senior non-preferred, noted another syndicate banker.

“We saw three European issuers coming in on a Monday on either senior preferred or senior non-preferred,” he said, “so everyone is saving covereds for a rainy day.”

“I would be surprised if we were heading towards a truly active week for covered bond issuance,” he added, “so the asset class is still not exactly flavour of the month – or even year, for that matter.”

Any new issue would be met warmly by investors given the lack of supply, he suggested.

“It practically makes any deal a done deal before it’s even started.”

A back-up in yields today saw the 10 year Bund reach least negative level since September, which market participants attributed to reflation expectations.

“Forward measures of inflation are rising and upward pressure on UST and core European bond yields has gained momentum, thanks largely to the notion of a vaccine-led economic rebound in H2,” said the Rabobank analysts, who nevertheless questioned the move in the face of Eurozone GDP growth forecasts for the year being cut from 4.2% to 3.8% by the European Commission last week.

A syndicate banker said that for supply prospects, the rise in yield is a not a “game-changer”.

“It’s not massive, but it’s looking a lot less disastrous than it has been,” he added.

“On aggregate we’re still miles away from anything fixed income being a source of fixed income again.”

Joost Beaumont, senior fixed income strategist at ABN Amro, said the lack of supply has also helped the performance of issuance thus far this year. Euro benchmarks issued in January and this month have tightened an average of 3bp from re-offer, according to Beaumont, the same as the secondary market as reflected in a 3bp tightening of the iBoxx euro covered index to 5bp.

“Meanwhile, spreads of higher yielding covered bonds – such as those from Slovakia, Estonia, South Korea and Poland – have already tightened by more than 7bp,” he added. “This is in line with our key convictions at the start of the year and we see still some further room for these covered bonds to outperform.”

ING head of financials strategy Maureen Schuller, meanwhile, expects performance of the tighter end of the market to remain constrained, despite the back-up in yields since the beginning of the year. Her position is based on the observation that seven to 10 year Pfandbrief spreads, for example, have struggled to break into negative asset swap territory when yields have been far below zero.

“Besides, the second important performance constraint, namely covered bond spreads over Bund trading levels, also don’t offer any more space to performance than they did at the end of last year,” she added. “For these reasons, we have our doubts the Markit iBoxx euro covered index will manage to approach or break through the 0bp level.”