As the covered bond market continued on its relentless march around the globe in the first half of 2007 and more and more jurisdictions were converted to the cause, one of the major selling points used by the asset class’s most zealous evangelists was that it was, in effect, a proxy rates product rather than part of the credit world.
While the benign conditions early in the year did not offer the kind of backdrop against which this assertion could easily be tested, the mid-summer new issuance stagnation and the liquidity crisis sparked by US sub-prime related fallout created just the type of challenging environment that posed some difficult questions.
As to whether covered bonds lived up to their billing or singularly failed to perform as well as many had hoped and claimed they would is a moot point. IFR assembled a number of market participants to discuss this and a number of related topics in early September. The meeting taking place in Germany, the product’s spiritual home.
The consensus was that, while the covered bond market was far from untouched by the events affecting all corners of the world, it had performed well compared to many other asset classes. With many sectors grinding to a halt in both primary and secondary, the covered bond market had at least managed to maintain a semblance of liquidity, albeit in an understandably reduced fashion.
The doubt surrounding some market-makers’ commitment to continuing quoting bid/offer spreads, even at the widened margins ushered in to take account of the circumstances, was addressed. The consensus was that issuers and investors alike would take stock of how some had conducted themselves and react accordingly when awarding future mandates or orders.
And much as differentiation between underwriting banks was expected to creep in as a result, so it was envisaged that far greater stock would be taken of the various issuing entities. Gone were the days of generic spreads on issues all rated Triple A – the future is likely to be a far more discerning place.
The meeting was held just as HBOS was marketing its latest transaction – the first jumbo to be launched since volatility began in earnest – and it was widely anticipated that this would offer an indication as to just how much the market had been repriced during the course of the liquidity crisis. This was before Nationwide made its announcement that it too was coming to market (and before the Northern Rock story reached its final chapter).
While far from ideal, this did serve to underline an important point: that market conditions and events change quickly at present. The larger question is now how individual sectors can adapt and whether they will be able to cope with future ructions. The view that emerged from the meeting was sanguine, but only time will tell whether this was an accurate prediction of how the covered bond market will fare.
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