It has been a remarkable year for the covered bond asset class. The record number of new issuers that have entered this market is particularly striking. So is the record widening of spreads, later culminating in an equally dramatic tightening after the ECB waved its magic wand. The prospect of new jurisdictions creating covered bonds markets, or the reintroduction of so-called fallen angels, which in some cases have been in exile for a number of years, sets the scene for an exciting 2010.
It is easy to forget, however, that since IFR held its last covered bond roundtable in October 2008, the primary jumbo market has been closed for months at a time. Getting a deal through was often a luxury reserved for the privileged few.
The collapse of Lehman Brothers triggered the longest market freeze since the creation of the jumbo sector. So fragile were the conditions at the beginning of this year, some covered bond analysts were unwilling to put a figure potential jumbo issuance. Others predicted the fist half of 2009 would not bring any jumbo issuance whatsoever.
Concerns that the introduction of government guaranteed bank bonds would leave covered bonds facing a crisis of identity later proved unfounded – though the question of whether covered bonds are a rates or a credit product looks set to run. For now, most seem to accept they are a hybrid of the two.
Equally challenging was marrying the needs of investors and issuers. The former were often sitting on some miserable positions, while the latter were unwilling to accept the wider spreads. But to give credit (or should that be rates?) where it's due, some issuers were brave enough to dip their toes into the murky pre-ECB covered bond waters, and had to concede much higher clearing spreads for doing so.
The market recovery began in late April, though the announcement from the ECB in May that it would provide support to covered bonds in the form of a €60bn purchase programme sent the primary market into free-fall. September yielded its second busiest month since the inception of the jumbo market in 1995. At around €28bn, it far exceeded the supply from the first four months of this year, when investor demand only facilitated €15bn of new supply.
By October, new issue volumes had surpassed the €100bn mark, pushing the jumbo asset class into positive net supply territory. Considering that estimates at the beginning of the year were for anything between €35bn and €65bn, that is something of an achievement.
IFR brought together key players in the covered bond market, including issuers, investors, DCM and rating officials and representatives from the secondary markets. Support for the product seemed stronger than ever.
But there was an acknowledgement that stumbling blocks remain. The rating agencies continue to hang over the market like the sword of Damocles. The ECB programme is scheduled to end in June 2010 and its exit strategy must be carefully executed to maintain an orderly market. The question of how the market will perform without artificial lungs is perhaps the most significant of all.
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