Market participants are beginning to push back forecasts of renewed activity into 2012, as poor conditions this (Monday) morning did little to encourage issuers to enter the market and hopes of a first Australian euro benchmark dissipated in the wake of dollar debuts last week.

A clear victory for Spain’s centre-right People’s Party in a general election yesterday only provided the basis for a short term tightening this morning, with spreads widening again, according to a syndicate official.

Mariano Rajoy, Spain's incoming prime minister

“The Spanish election was supposed to be good news, but it was more than priced in,” he said. “The tone is relatively soft.”

A Moody’s warning that the stable outlook on France’s triple-A rating is under pressure added to fragile market conditions, according to another syndicate official, although he said that the statement contained nothing new.

Execution risk would be high for any new issue projects, he added, saying said that while taps were generally always an option, new benchmarks would be a more challenging prospect, and attributed this to a lack of depth in the market.

And with year-end approaching, declining liquidity is combining with the persistent market volatility to complicate new issuance, he said, adding that he does not think the market will rebound strongly before the end of the year. Another syndicate banker said market participants seem reluctant and ready to delay until January.

“There are a low number of accounts generally getting involved in the market,” he said, “look at the low number of German accounts in the RBS transaction.”

German participation was 5% in a Eu750m five year covered bond from Royal Bank of Scotland sold last Wednesday.

Market participants said that no concrete new issue projects were underway. One said that Lloyds was rumoured to be considering a deal, but he said he heard it had decided not to approach the market.

A portfolio manager said that he was not aware of European issuers planning benchmarks, but suggested that if the Eurosystem bought French covered bonds under its covered bond purchase programme (CBPP2), as it had done in the case of a dual tranche tap from Crédit Mutuel Arkéa, French supply could be possible.

“But with sovereign levels where they are it is very tough to find the other investors to bring into the product,” he said.

Settled covered bond purchases under CBPP2 stood at Eu459m as of this morning, a Eu263m increase from Friday. The increase is likely to capture buying under the programme of the Eu1bn Crédit Mutuel Arkéa dual tranche tap priced on 9 November as the increases – Eu250m of a Eu1.25bn June 2015 issue and Eu750m of an April 2021 deal – settled on Friday. Central banks were allocated 20% (Eu150m) of the 2021 tranche and 38% (Eu95m) of the 2015.

The most recent euro covered bond mandate to have been publicly announced was a debut for Commonwealth Bank of Australia, which appointed BNP Paribas, CBA, HSBC and Royal Bank of Scotland to lead manage what was expected to be a five year trade. A syndicate banker away from the leads last week said the deal had been postponed, but a syndicate official working with the issuer said at that time that some investors were still doing investor work. A banker away from the leads said all eyes were on CBA and whether it was looking to enter the market.

Fellow Australian issuers ANZ and Westpac opted to tap the dollar market last week, selling $1.25bn and $1bn five year deals, respectively. These were criticised for poor execution by some syndicate bankers away from the leads, and an investor today told The Covered Bond Report that from his perspective the bonds did not appear to have been fully placed with end investors.

The pricing and timing of the deals were ambitious, he said, providing for a “much less positive show from the Australian issuers” than had been hoped for. The deals were not priced “crazily cheap”, he said, adding that the levels would be fair in a more normal market.

He said the latest secondary level he had for the Australian dollar deals was around 170bp over Treasuries, roughly 10bp wide of re-offer spreads. However, he said that the transactions were successful from the issuer perspective, in particular given a poor market backdrop.

The investor said that the Australian dollar supply came at expensive levels compared with where euro issues from the jurisdiction had been rumoured, and that ANZ and Westpac had probably opted to tap the dollar market because it provided cheaper funding and because euro investors are having a more difficult time dealing with their exposures than US accounts.

“The euro issue got a little more negative feedback from investors at the beginning,” he said. “You can argue that there is a deeper investor base in Europe, but obviously they have big problems on their hands at the moment.

“I’m not sure the diversification trade into different countries is what European investors are looking for at the moment.”