The ECB announced that it “expects to discontinue the reinvestments under the APP (asset purchase programme) as of July 2023”, after continuing to reduce APP holdings by an average of €15bn per month until then. The news accompanied a 25bp rate hike and was in line with recent expectations regarding the central bank’s overall stance.

“We’ve decided to expect the effectiveness of the [APP] decision as of July – saving a little bit of optionality just in case – simply because we have seen that the partial reinvestment that has been effective since March has actually run very smoothly and has been well-absorbed by markets,” said ECB president Christine Lagarde (pictured).

Indeed, covered bond market participants highlighted how well-functioning the market has proven since the ECB stopped primary market purchases under its third covered bond purchase programme (CBPP3) in February and against a backdrop of lower buying in the secondary market.

“I’m not really concerned about the ECB turning its back on covered bonds,” said one. “We just expect some minor spread widening up until the middle of the year.”

DZ Bank analysts cited the higher yields available on covered bonds as having both supported demand for new issues and the stability of covered bond spreads amid the recent market volatility induced by banking sector turmoil.

And although they noted that headline risks could increase risk premiums in the coming weeks, they expect the iBoxx Euro Covered index to return to its current level – around 20bp – on a three month horizon, with the potential for as much as 10bp of tightening over the coming year on the back of greater calm in the market and higher yields.

More “normal” issuance activity in the second half of the year than the €100bn-plus of euro benchmark supply year-to-date should make the ECB move more digestible, according to Commerzbank analysts, without any significant spread distortions.

NordLB analysts nevertheless expect the ECB’s withdrawal to reinforce greater spread differentiation across jurisdictions and issuers.

The only euro benchmark issue this week was a €500m six year Pfandbrief for Sparkasse Pforzheim Calw on Wednesday. Leads Commerzbank, DekaBank and Helaba priced the new issue at 11bp over mid-swaps, 3bp tighter than initial guidance on the back of a final book of some €840m and with the new issue premium put at around 3bp.

Photo credit: Angela Morant/ECB

Unlike a cut in the Eurosystem’s orders from 20% to 10% last week, the absence of a CBPP3 ticket from Berlin Hyp’s book – the first eligible euro benchmark to have been launched with a settlement date in March – was in line with expectations since the European Central Bank gave its latest asset purchase programme update on 2 February, when it flagged the phasing out of primary market purchases ahead of the start of only partial reinvestments of APP maturities in March.

“They were not in today’s BHH,” said a syndicate banker. “We only have that deal to go by so far, but we expect it to hold true going forward.”

While the fate of the primary market after the Eurosystem’s departure has been a topic of much debate in the past months and years, the predictable nature of its end amid an otherwise strong covered bond market – where CBPP3 will continued to be active in the secondary market – has led many market participants to play down its ultimate exit.

“Their presence was already negligible prior to this,” said one, “so the 10% difference shouldn’t rock anyone’s boat – if it would, then there’d have to already be something wrong with the deal.

“Any impact should be purely psychological and as such hard to identify.”

But another banker was more circumspect.

“Let’s not be arrogant,” he said. “The covered bond market is very strong and plenty of private investors are involved, but for some of the smaller, rarer names that don’t appeal to everyone, an ECB order will always be helpful – we saw a couple of deals this year where Eurosystem enabled them to get over the line.

“Such issuers will have to stay slightly more conservative, picking investors’ sweet-spot in terms of maturity, for example, rather than going for something longer or unusual, and those concerned about momentum could start out a little wider.”

Syndicate bankers perceived no direct impact on Berlin Hyp’s five year mortgage Pfandbrief today, although noted that the transaction had perhaps not been priced as tightly as might have been expected.

Leads Citi, Commerzbank, HSBC, LBBW and UBS went out with guidance of the mid-swaps plus 4bp area for the March 2028 euro benchmark, expected rating Aaa. They ultimately priced a €750m issue at plus 1bp on the back of some €1.1bn of orders.

“The comps that were circulated pointed to a pretty aggressive move from 4bp,” said a banker away from the leads, “and I imagine that €750m at 1bp was not exactly the outcome they had in mind.”

Berlin Hyp €750m October 2027s issued in October 2022 were at around minus 4bp, mid, according to those comparables, and he put fair value for the new straight five year at minus 3bp, implying a new issue premium of 4bp after a starting pick-up of 7bp at initial guidance.

“But it was a solid deal,” he added.

Another banker said the Eurosystem’s absence from order books could mark an inflection point for the pricing of the richest Pfandbriefe.

A €1bn five year deal for HSBC Canada was meanwhile around twice subscribed, with bankers citing the 32bp spread available on the five year paper as helping tempt asset managers on top of bank treasuries active in the market, while the maturity attracted central banks and official institutions keen on that part of the curve.

Leads BMO, Commerzbank, CIBC, Danske, HSBC, Natixis, Rabobank, RBC and ScotiaBank tightened pricing from guidance of the 35bp area for the March 2023 euro benchmark, expected ratings Aaa/AAA (Moody’s/Fitch).

Bankers put fair value at around 29bp, with HSBC Canada September 2027s seen at around 28bp mid, while the last five year Canadian benchmark, a €1.75bn deal from Bank of Nova Scotia on 9 January, was around 26bp. HSBC Canada is being acquired by Royal Bank of Canada and the latter’s September 2027s were seen at around 23.5bp, with HSBC Canada paper still trading wide of the country’s top tier names.

“It’s interesting, because it’s basically a covered bond issued by HSBC Canada, but you’ll get your money back from RBC,” said a lead banker, “so it’s basically an RBC proxy. It has good tightening potential that will hopefully leave everyone with a good feeling during the transition process.”

As well as smoothly riding out the Eurosystem’s exit, the primary covered bond market has proven resilient to weakness in credit markets in the past fortnight, said bankers, who expect further issuance to emerge as banks have left blackouts, although the record-breaking pace at the start of the year is not expected to resume.

The only officially announced euro mandate in the pipeline is a sub-benchmark for Bank of Åland (Ålandsbanken). The Finnish issuer is holding investor meetings for a planned three to five year deal via LBBW, Nordea and Swedbank.

The Eurozone issuers enjoyed the Eurosystem bid for 10% of trades in place since last week, ahead of an anticipated cut to zero for deals settling from 1 March – which is likely to be the case for any subsequent euro benchmarks using standard settlement practices.

However, some participants expect CBPP3 to remain supportive for the asset class in the near term, at least.

“The bid of the Eurosystem in the secondary market should remain powerful in March given the elevated amount of redemptions,” said one. “Thereafter, it is unclear – redemptions are much lower in Q2, while the €15bn the ECB intends to remove from the market between March and June pro rata across the four APP programmes will start having an impact.

“It will be more or less pronounced on spread performance depending on the density of supply in SSAs, particularly if swap spreads continue to narrow.”

After a mandate announcement on Monday, Nationale-Nederlanden Bank (NN Bank) leads ABN Amro, Deutsche, HSBC, LBBW, Rabobank and SG opened books this morning with guidance of the mid-swaps plus 14bp area for a euro benchmark-sized May 2027 green covered bond, expected rating AAA (S&P). The spread was set at 10bp and size at €750m on the back of books above €1.7bn, and demand ultimately reached some €2bn.

The new issue premium was seen at around 1bp – NN Bank September 2025s were at plus 6bp and its September 2028s at plus 12bp, according to pre-announcement comparables circulated by the leads.

Banco de Sabadell leads Barclays, Commerzbank, JP Morgan, Natixis, Sabadell and UniCredit priced the Spaniard’s €1bn August 2026 cédulas hipotecarias, expected rating Aa1, at mid-swaps plus 25bp following initial guidance of the plus 32bp area, tightening pricing some 7bp on the back of some €4.25bn of orders to land at a new issue premium of just a couple of basis points.

Syndicate bankers noted that the two issuers had tapped the still-favoured short end of the curve with their four-and-a-quarter and three-and-a-half year trades, respectively. NN Bank’s green success followed that of its green debut last May, and Sabadell found strong demand for its peripheral paper while taking year-to-date Spanish supply to €7bn, more than the €6.5bn across the whole of 2022.

Crédit Agricole Home Loan SFH attracted aggregate demand of some €3.8bn yesterday (Monday) for September 2026 and September 2032 tranches, allowing €1bn apiece to be printed 5bp and 4bp inside initial guidance, respectively, at plus 3bp and 29bp, equivalent to NIPs of 1bp-2bp.

Demand was slightly skewed to the shorter-dated tranche, and a banker noted that SEB achieved stronger execution momentum with its €1.5bn five year trade yesterday than had Nordea Mortgage Bank with a €1bn seven year last week. The Swede was able to tighten pricing from the mid-swaps plus 19bp area to 15bp on the back of some €2.5bn of orders and achieve a new issue premium of around 3bp.

A banker also highlighted that the non-Eurozone five year came at the same re-offer spread as a shorter dated, June 2027, issue from France’s Crédit Mutuel on Monday of last week, highlighting the normalisation of the market as the ECB exits the primary market.

From the beginning of March until the end of June, the central bank is reducing the asset purchase programme (APP) by €15bn per month by the only partial reinvestment of maturing securities. These will be allocated proportionately to the share of the constituent APP programmes – the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3), and the corporate sector purchase programme (CSPP), the ECB said yesterday.

“During the period of partial reinvestment, the Eurosystem will retain the existing smooth reinvestment approach,” it added.

For its private sector programmes (ABSPP, CBPP3, CSPP), “primary market purchases will be phased out by the start of the partial reinvestments in order to better steer the amount of the purchases conducted under each programme” – with the exception of non-bank corporates being sought for the green tilt of CSPP.

Issuers already front-loaded issuance plans this year – contributing to the second-biggest January for euro benchmark supply – partly in order to beat an anticipated reduction in the Eurosystem order for new issues from 20%, although market participants tended to expect a cut to 10% at the beginning of March (with the outside chance of such a reduction at the start of February).

Following the ECB’s announcement, analysts now believe the cut could be greater, and raises the possibility of the Eurosystem leaving the primary market completely as early as the end of February – although the statement’s wording left room for interpretation. DZ covered bond analyst Jörg Homey, for example, said that he expects the CBPP3 order to amount to no more than 10% in March, and possibly even less, noting that 0% should not be ruled out.

Joost Beaumont, head of bank research at ABN Amro, is among those expecting the Eurosystem to stop buying covered bonds for primary market issues that have a settlement date in March, although he said it could at best buy around 5% of new issues.

“The fact that demand for covered bonds has strengthened somewhat in January will probably comfort the Eurosystem that its exit from the primary market will go smoothly,” he said.

“If the Eurosystem were to leave the primary market in March, we expect that this will have a widening impact on spreads, as issuers will need to pay higher new issue premiums to find new investors to fill the gap that the central bank leaves behind,” added Beaumont, noting that in the past, spreads widened around 5bp-10bp following reductions in the Eurosystem order size.

Several market participants said issuers could bring forward new issue projects into February to benefit from the current 20% order. Maureen Schuller, head of financials sector strategy at ING, noted that €6bn is set to be reinvested by the Eurosystem, with the primary market still able to contribute to this.

Should the Eurosystem follow its usual practice of applying the modalities according to settlement date, and cease primary market purchases for issuance that settles from 1 March, the last feasible issuance date to benefit from a CBPP3 primary order could be Thursday, 23 February – Deutsche Bank in June 2022 used T+3 settlement to beat a previous anticipated Eurosystem order reduction, but longer settlement periods are typically used. This would leave a window of less than three weeks for issuers seeking a final CBPP3 boost.

The ECB’s announcement comes in the first week of the year to see no euro benchmark covered bond issuance. A €250m five year mortgage Pfandbrief for Sparkasse Hannover was the only public issuance of note and first CBPP3-eligible deal settling in February to hit the market, confirming the continuation of the ECB’s prevailing 20% order.

Christine Lagarde photo credit: Adrian Petty/ECB

The possibility of CBPP3 orders being reduced from 20% to around 10% was a contributing factor in January’s bumper issuance, with issuers having been to avoid risking the fallout from any cut, and, following a mandate announcement on Friday, Sparkasse Hannover was the only deal officially mandated for expected launch this week.

Leads BayernLB, DekaBank and Erste opened books with guidance of the mid-swaps plus 12bp area for the €250m no-grow February 2023 mortgage Pfandbrief, expected rating AAA (Fitch), which settles on 7 February. After a little over an hour, they reported books above €600m, including €65m of joint lead manager interest, and after around an hour and 40 minutes, they revised guidance to 9bp+/-1bp, will price in range, on the back of books above €670m, including €75m of JLM interest. The final terms were after around two hours set at 8bp for the €250m size on the back of books above €750m, and the final order book was above €675m.

A lead banker said that Sparkasse Hannover could be relaxed about whether or not the Eurosystem order would change, and ultimately the deal was three times oversubscribed at peak.

“The sub-benchmark size means there isn’t that much that needs to be filled in the order book,” he said. “Blackout periods and other factors such as the ECB and upcoming central bank meetings also meant we knew there would not be much competing supply.

“And with it being zero risk weighted for the savings banks association there is a natural demand for these kinds of issuances – it wasn’t purely savings banks or Landesbanks, as we had a lot of institutional orders as well, but the driver was obviously the domestic accounts.”

The Eurosystem meanwhile maintained its 20% ticket.

“So that has changed so far,” said the lead banker. “We hadn’t expected it to. We expect the 20% order to remain in February and that in maybe March the order will be reduced, to 10%, for instance.”

German accounts were allocated 77%, Austria and Switzerland 10%, Denmark 7%, and southern Europe 6%. Banks took 74%, asset managers 15%, central banks 7%, insurance companies and pension funds 1%, and others 3%.

The leads saw fair value at around mid-swaps plus 5.5bp, putting the new issue premium at around 2.5bp.

A syndicate banker away from the leads said that it marked an encouraging start to the week, particularly after heavy supply so far this year.

“It’s interesting to see how deals are going because of the sheer volume of what has been issued in January,” he said.

With euro benchmark supply of almost €40bn, and higher including sub-benchmarks, January issuance is the second highest ever.

ING: January 2023 is one of the historically highest January months of covered supply

However, even with the Eurosystem order apparently maintained for February, and mandates for benchmark and sub-benchmark issuance this week in hand, market participants expect the pace of supply to moderate.

“We already have blackout periods contributing to limited supply and the major central banks happenings coming up,” said one. “When issuers come out of blackouts and there is more clarity on the ECB and Fed paths, we could see activity pick up.

“But after what we saw in January, I don’t expect things to continue to be so busy – issuers may also look at the senior market, where conditions are good.”

He noted how a €500m four year green senior preferred issue for Deutsche Pfandbriefbank (pbb) today was almost three times oversubscribed, while a €500m six year mortgage Pfandbrief it sold on 12 January had been barely subscribed.

And Maureen Schuller, head of financials sector strategy at ING, said she expects volumes to be more moderate across 2023, even if year-to-date supply is already some €12bn ahead of that of the record-breaking 2022. Among factors she cited were TLTROs giving banks reason to front-load their covered bond issuance, and 2023 CBPP3 reinvestments being weighted towards January and February.

After the Caisse Française de Financement Local (Caffil) mandate was announced yesterday (Monday), leads BNP Paribas, ING, La Banque Postale, LBBW and Natixis opened books for the benchmark-sized November 2027 green obligations foncierères, rated Aaa/AA+AAA (Moody’s/S&P/DBRS), with guidance of the mid-swaps plus 15bp area. After around an hour and 25 minutes, they reported books above €1.1bn, excluding joint lead manager interest. After almost two and a half hours, they revised guidance to 12bp+/-1bp, will price in range, and set the size at €750m on the back of books above €1.45bn. The deal was ultimately priced at 11bp, with around €1.6bn of demand good at re-offer, excluding JLM interest.

According to pre-announcement comparables circulated by the leads, Caffil September 2027s were quoted at 5.5bp, February 2028s at 8bp, April 2028s at 8bp, and green November 2029s at 11bp. A lead banker for the new November 2027 green issue put the new issue premium at 4bp.

“A very successful trade, moving four basis points,” said a syndicate banker away from the leads. “It’s green, which still helps one or the other account get involved, and I heard that at an early stage they made it clear that the maximum for this one was €750m, so as soon as they communicated that the book was above a billion, investors knew it was a safe bet.”

Another highlighted the unusually short maturity for Caffil, and said this helped demand for the frequent issuer. Bankers noted that the result was stronger than that achieved by the French issuer on 10 October when it sold a longer dated, €1bn long six year issue that attracted some €1.35bn of orders.

The unexpected and unexplained absence of a Eurosystem CBPP3 order for the last transaction contributed to its outcome. Central banks and official institutions are understood to have taken 35% of the new issue.

Some 78% of the paper was meanwhile placed with ESG investors. Caffil’s green covered bond is the first off a new and enlarged green, social and sustainability framework established last month that encompasses issuance by both Caffil and parent SFIL.

Following a mandate announcement yesterday, leads Credit Suisse, DZ, Helaba, NordLB and UBS opened books for MünchenerHyp’s benchmark-sized August 2027 mortgage Pfandbrief, rated Aaa, with guidance of the plus 5bp area this morning. After around an hour and a half, they reported books above €750m, including €80m of JLM interest, and after a little over two hours they set the spread at 1bp on the back of orders above €950m. They ultimately sized the issue at €700m on the back of more than €850m of orders good at re-offer, including €80m of JLM interest.

A lead banker put fair value at minus 2bp-1.5bp through mid-swaps, with the new issue premium of 2.5bp-3bp being well below the high single-digits more typically seen on new issues.

“People are on this name almost always accepting tighter prints than for almost any other name,” he said. “It’s definitely a good achievement for the issuer.

“It demonstrates that if a well appreciated name comes along in a well appreciated tenor, there is more on the table than a final concession of, say, 8bp,” he added.

With the plus 1bp spread was the optimal outcome for the issuer, MünchenerHyp was keen to take more rather than less out of the market, according to the lead banker, and while €750m was adjudged too much given the final level of demand, the book was deemed sufficiently strong to support more than the next biggest standard option, €625m. The deal was therefore sized at €700m, with the lead banker citing recent deals of sizes such as €1.35bn and €600m as demonstrating that the market has become less dogmatic.

“It is a pragmatic way of looking at things,” he said. “We didn’t get any negative feedback from investors.”

The Mortgage Society of Finland issued a €300m five year covered bond via Danske, Erste and Swedbank. Initial guidance of the mid-swaps plus 25bp area was revised to 25bp+/-2bp on the back of more than €390m of demand, and the transaction was ultimately priced at 23bp on the back of some €430m of orders, including €20m of JLM interest.

“For a sub-benchmark from a rare issuer, that’s really quite good,” said a lead banker. “It was very decent execution, with good participation from not just friends and family back home, but also internationally placement.

“We revised to 25bp plus or minus 2bp after it was clear that we were comfortably done on the €300m,” he added, “but that there was some price sensitivity in the book, and there was no need to push it.”

The lead banker noted that the Mortgage Society had come not far back of the plus 20bp level at which larger compatriot Sp Mortgage Bank priced a €750m five year on 24 October, with that deal having tightened around 1bp since launch.

Møre Boligkreditt is due to launch a €250m (NOK2.56bn) no-grow five year green covered bond, having mandated LBBW, Nordea and Swedbank as bookrunners. And Sparkasse Hannover has mandated a €250m no-grow four year mortgage Pfandbrief to DekaBank, Helaba and NordLB.

In the sterling market, Barclays Bank is expected to launch a rare £500m (€573m) no-grow covered bond after a mandate announcement today. The UK issuer has mandated ABN Amro, Barclays, Commerzbank, Danske, ING, Lloyds, RBC, Santander, Standard Chartered and TD for the five year Sonia-linked issue, expected ratings Aaa/AAA/AAA.

The new covered bond will be Barclays’ first since May 2019.

The Eurosystem has been placing orders for 20% of eligible new issues since the end of June (reduced from 30%), but the anticipated order via the Banque de France, as the national central bank, did not materialise when the SFIL subsidiary’s latest euro benchmark hit the market on Monday morning.

Syndicate bankers struggled to recall the Eurosystem having similarly skipped participating in an eligible new issue during any of its covered bond purchase programmes.

“There was a kind of deviation from what the Banque de France has done so far,” said a syndicate banker. “Across the Eurosystem, the local central banks have been extremely consistent in what they are doing.

“And then on Caffil, out of the blue, they didn’t participate. It’s very difficult to understand why – everyone can have their own opinion.”

Some market participants noted that Caisse Française de Financement Local (Caffil) has been one of the biggest issuers of euro benchmarks from one of the biggest covered bond jurisdictions. The non-covered bond issuance of its parent, SFIL, is also eligible for the Public Sector Purchase Programme (PSPP) part of the European Central Bank’s Asset Purchase Programme (APP).

Responding to an enquiry from The CBR, an ECB spokesperson said the Eurosystem does not comment on reasons for its participation, or lack of participation in specific primary issuances.

“The Eurosystem has full discretion to purchase or refrain from purchasing any covered bonds meeting the CBPP3 eligibility criteria,” he said. “This also applies to primary issuances.”

Issuers and their lead managers do not typically comment on Eurosystem participation in new issues at the behest of the ECB.

In spite of the Eurosystem’s absence, Caffil generated a book of some €1.35bn and was able to price the €1bn February 2029 obligations foncières at 11bp over mid-swaps, 2bp inside the middle of initial guidance and with a new issue premium in line with much recent supply. Central banks were allocated 20% of the new issue, Caffil’s fourth euro benchmark of the year, compared with 32% on a €1bn 12 year in May, 47% on a €1bn six year in April, and 27% on a €500m 20 year in January.

Caffil’s trade was the only new euro benchmark on Monday, and the Eurosystem returned with its anticipated order for subsequent issuance, including a €1bn January 2030 issue for compatriot La Banque Postale, one of three eligible deals on Tuesday, to the relief of many market participants.

“I can confirm that the ECB is still playing,” said a syndicate banker. “That’s crucial information, because we saw the trade where they weren’t involved at all and syndicates were unsure if we could still count on the Bundesbank, Banque de France, etc, but it has turned out to be a one-off.”

Another syndicate banker said the market is also well placed to be able to withstand such disruption.

“It obviously makes our life as dealers more complicated,” he said, “even if, for the time being, it doesn’t look like the covered bond market cannot work without the support of the purchase programme. And we can be very happy about that – if something like this would have happened last year, I can tell you, spreads would have gone through the roof.”

Société Générale SFH has mandated BayernLB, CaixaBank, DZ, ING, NatWest, Santander and UniCredit for six and 12 year euro benchmarks.

The deal will be the longest euro benchmark since ING issued a €750m 15 year at 15bp over mid-swaps as part of a two-tranche trade on 10 February.

“This is a bit uncharted territory,” said a syndicate banker at one of SG’s leads, “given that we haven’t seen longer than eight years for some time.”

The last euro benchmark beyond eight years was a €500m 10 year for Crédit Mutuel issued on the eve of Russia’s invasion, on 23 February, at 8bp over as part of a €2bn two-trancher.

“There is some logic to this one,” added the lead banker, “given the level of absolute yields. It will be interesting to see what lessons there are to be learned.”

Along with a planned sub-benchmark for Oberbank (see below) and any other CBPP3-eligible deals that hit the market tomorrow, SG’s transaction will settle next week, thereby providing clarity on whether the Eurosystem will reduce its order further, from 30% to 20%.

Market participants have closely watched the progression of deals at times when CBPP3 orders have been reduced to reflect the changes in the European Central Bank’s Asset Purchase Programme volumes. Most recently, a €1bn five-and-a-half year green covered bond from OP Mortgage Bank on 29 March was the first euro benchmark with an April settlement and as a result the first to face a reduction in the CBPP3 order from 40% to 30%. However, any impact of the lower order on demand or pricing was negligible, as the Finnish issuer successfully got its deal away, and the primary market has remained orderly in the aftermath, according to syndicate bankers.

The cut from 40% to 30% coincided (in terms of settlement date) with the end of new net purchases under the Pandemic Emergency Purchase Programme (PEPP) and the first month of a scheduled three-month phase-out of net new APP buying, with the second step coming at the turn of this month, over the weekend, meaning any deals settling from next Monday onward (2 May) are not seen as being guaranteed to receive the 30% order – although some analysts expect the size to be maintained through this quarter.

“That’s the big question,” said a syndicate banker at another of SG’s leads. “Rumour has it that for deals settling in May the ECB will again change their stance and reduce their primary market activity. – but nothing is certain.

“Another option for them would be to stick at 30% but not let their interest grow with the deal, as they did once before.”

According to pre-announcement comparables circulated by the leads, SG SFH January 2028s were quoted at mid-swaps plus 0.5bp, mid, and its February 2031s at plus 4.2bp.

The planned French benchmark comes after only one euro benchmark hit the market in each of the past two weeks either side of the Easter weekend. €750m and €500m five year deals for Austria’s RLB NÖ-Wien and RLB OÖ were accompanied by sub-benchmark issuance from the country – as only a €300m deal for Finland’s Sp Mortgage Bank last Wednesday prevented a monopoly on supply – and two further Austrian sub-benchmarks are now in the pipeline.

Oberbank is planning a €250m no-grow seven year mortgage covered bond via DZ, Erste and Helaba. Its January 2030s were quoted at minus 9bp, according to pre-announcement comparables circulated by the leads.

Raiffeisen-Landesbank Tirol is planning an inaugural sub-benchmark covered bond. Erste, LBBW, RBI and UniCredit have the mandate for the €300m no-grow five year mortgage covered bond, scheduled for launch after investor calls today and tomorrow.

RLB Tirol’s mandate comes after Hypo Tirol Bank on Thursday issued a €300m no-grow five year issue, rated Aaa, at 10bp over mid-swaps. ABN Amro, DekaBank, Erste and LBBW had gone out with guidance of the 14bp area and built a final book above €800m, including €90m of joint lead manager interest.

On 10 March, the ECB announced that Asset Purchase Programme (APP) purchases would henceforth be lower than announced in December, amounting to €40bn in April, €30bn in May and €20bn in June, and yesterday’s Finnish deal is the first CBPP3-eligible benchmark to settle under the new schedule (on 5 April).

The ECB has previously cut order the Eurosystem’s standard orders at quarter-ends when reducing targeted monthly APP amounts, with issuers having at times achieved weaker results than anticipated when unexpectedly being the first to face reduced orders, and the potential for such a shift this week was flagged ahead of OP’s deal.

The ECB does not comment on its order sizes and bankers are asked to refrain from doing so, but The CBR understands the CBPP3 order for OP was indeed 30%, rather than the previously typical 40%.

The Finnish issuer nevertheless achieved an order book of some €2bn at re-offer and achieved pricing of 2bp over mid-swaps, following initial guidance of the 6bp area.

A lead banker put the new issue premium at 3bp-4bp. He noted that OP’s curve implied fair value of around minus 2bp, and said that while the pricing of a €1.5bn seven year for compatriot Nordea Mortgage Bank on Thursday at 4bp suggested fair value was slightly wider, Nordea’s deal also factored in some new issue premium.

“We achieved a very pleasant outcome against this market backdrop where there are still some question marks,” he said. “We have seen brutal moves in rates, and there was also some uncertainty how the ECB would behave given the April settlement, in light of the tapering discussions, even if we were not overly concerned about the feasibility of an OP Mortgage green covered bond in an intermediate tenor.

“But we were a little firmer in making the right recommendation in terms of starting point and how we would address things if the ECB scaled back. And overall, it probably went a little better than anticipated, in a market that is a tad more challenging than when Nordea hit the market almost a week ago.”

A banker away from the leads suggested OP might have achieved a marginally tighter outcome had it not been for the ECB’s move, if only because the leads could have gone out with a slightly lower starting point.

He said he expects the market to quickly come to terms with the ECB’s moves.

“You could argue it is unhelpful, but also that it is very long overdue,” he said. “It will maybe impact different issues in different ways, and maybe spreads over time. If you’re a small, infrequent issuer and you haven’t been doing a lot of IR while times have been easy, then you might want to rethink your strategy a little.

“But it’s certainly a place we’ve realised we are headed so I’m not overly concerned about it – the product didn’t necessarily need the assistance in the first place.”

DZ covered bond analyst Jörg Homey said the cut to the ECB’s order came earlier than he had anticipated, having viewed a May move as more likely.

However, he said that he does not expect the CBPP3 order to be reduced to zero anytime this year, noting that even in 2019 when there were no new net APP purchases, the ECB maintained a 5% order size.

“Given that redemptions in the CBPP3 portfolio are higher – we now have €3.4bn per month compared to €2bn at that time – I would expect a larger order,” said Homey.

Although no formal changes to monetary policy were announced, European Central Bank president Christine Lagarde in yesterday’s press conference cited “unanimous concern” about inflation, with the ECB expecting the uptick in prices to be higher and persist for longer.

In the wake of her comments, markets moved to price in a 10bp rate hike as early as June and around 50bp by year-end. The yield on the 10 year Bund rose some 11bp and then a few basis points further this morning to around 0.18%, its highest level since March 2019, while the five year Bund is at its highest level since April 2018, having backed up around 0.40% since the beginning of last week to around minus 0.03% today.

“If you’re going to go that fast, we basically get back to zero in the Eurozone by year-end,” said one market participant. “It’s not impossible, but that’s quite a move from where we were.

“The ECB has been behind the curve – and is in good company with the Fed there– but from where we’re sitting, it feels different in the Eurozone.”

The ECB’s hawkish tilt put pressure on financial credit spreads, with higher beta products such as AT1 and Tier 2 worst hit, but also senior non-preferred closing 3bp-8bp wider yesterday and senior preferred 2bp-5bp wider, according to one syndicate banker.

Another banker said that although spreads had been marked wider, little selling was seen, while covered bonds were resisting the widening. The most recent long-dated trade, a €1.25bn 11 year for Crédit Agricole Home Loan SFH, was quoted at 5.5bp/3.5bp after having been re-offered at 5bp on 18 January, while five year paper was said to be stable.

“It’s clearly not covered bonds that have moved,” said the DCM banker.

He suggested the sell-off in rates at the short end was overdone, but that the long end could sell off further, and that the market needed time to digest the ECB’s new position.

“We’ll see how things stand on Monday,” said the banker. “I don’t think it’s going to shut markets for new supply – the money is still there. It’s just going to be even more a case of looking for a day of stability, and then I’m sure issuers will just say, OK, these are the new levels, they may be wider than they were last week, but I’m going forward.

“We’ll then have to see how these new issues coming at elevated spreads perform. I’m sure that trades will start out in the front end of the curve, but there are still some more yield-focused investors who are interested further up out.”

Other bankers echoed the need for pragmatism in pricing, with investors having the upper hand, and the expectation that the short end will be the initial focus when supply restarts.

At yesterday’s press conference, Lagarde also reiterated the ECB’s anticipated sequencing – whereby rate hikes will follow the end of its asset purchase programme (APP) – and should it stand by this policy and markets prove correct, the APP, including CBPP3, could in theory be ended as early as June, rather than year-end, which had been deemed the earliest end-date. Crédit Agricole ECB strategist Louis Harreau, for example, now expects the APP to end in December, but said there is a risk of it ending in September, with a rate hike possible in December.

Covered bond analysts had been expecting CBPP3 to support covered bond spreads through 2022, but Rabobank analysts said today that given that a more formal pivot towards tighter policy is now more likely at the March ECB governing council meeting, the odds of less support for the second half of the year have increased.

However, they flagged record-high APP covered bond redemptions of €41bn this year, saying this means support from the ECB on the primary and secondary markets will remain substantial.

“Hence, there will still be quite some support for spread levels in our view, even if purchases were to be scaled back later in the year.”

Photo: Sanziana Perju/ECB/Flickr