IFR Covered Bonds Roundtable 2017
IFR held its Covered Bond roundtable on January 31 with delegates coming together at a strong start to the year for the asset class.
Spreads that had been under a bit of pressure at the end of 2016 are on a tear again, with the already tight getting tighter, demand growing and average deal sizes increasing.
But that’s not to say that the year ahead will be plain sailing and there are a number of factors casting a shadow over the market.
Elections are approaching in core European covered bond jurisdictions, such as France and the Netherlands, and the prospect of further political turbulence looms large.
The close link to the sovereign market means that volatility can easily spread to this traditional safe-haven asset but this is small fry in comparison to the potential impact of the end of the European Central Bank covered bond purchase programme.
From April, the ECB will reduce its overall monthly purchases to €60bn from €80bn and while the programme will go on until at least the end of 2017, market jitters could materialise before then.
The covered bond market has been the beneficiary of three programmes in recent years and under the current plan, the central bank holds over €212bn of covered bonds.
The expectation – and hope - is that the impact will be muted, at least for core European jurisdictions. However, history has shown that markets can react unpredictably when central banks try to wean them off support and peripheral issuers could find themselves caught up in a storm.
Bankers and issuers alike have become accustomed to the ECB stepping in at critical times and offering a helping hand.
The impact on the broader market has been significant, driving an all-too-familiar convergence between core German debt and that of more peripheral issuers.
While bank treasurers are buying an increasing amount of covered bond issues it will be hard to fill the void when the central bank steps back from the market, and those that benefited most from ECB purchases could find themselves most adversely affected when that safety net is removed.
On the regulatory front, the once-quiet asset class is now being shaken up amid a European harmonisation effort. While some argue that having a more homogenous asset class is good thing, it ignores the fact that there are many good reasons as to why countries have come up with different regimes.
Mortgage markets vary hugely from one country to another and regulators must bear this in mind or risk killing what might be a diverse but well functioning market.
How things will end up is unclear, and much depends on the political backdrop against which future negotiations take place – not least in Germany, which is as important in the covered bond market as it is in the broader EU.
What is clear is that for a market that has always prided itself on a certain dependability, things look uncomfortably interesting in early 2017.