Prices for covered bonds in the secondary market are misleading, and do not paint a holistic picture of where investors see fair value for new issues.
As a result, how a new euro covered bond is priced, relative to the issuer's secondary curve, is becoming less important.
This week, UniCredit Czech Republic and Slovakia landed its latest covered bond issue — a €500m 4.5 year — 4bp inside its curve. But that does not mean it came 4bp through fair value.
It is not accurate to say a bond has been priced through fair value if what is quoted in an illiquid secondary market does not accurately reflect what investors think.
Fortunately, new issue premiums — no matter how big, small or theoretical — are not the only markers of a deal’s success.
So ignore stale secondaries, ignore talk of fair value, ignore haggling over the last basis point — instead, look at who is buying these deals.
Yes, euro covered bonds are suffering from a lack of momentum as fast money shies away from the asset class. But this is not a bad thing.
Bank treasurers should want their paper going to reliable buy and hold investors, not those looking to flip the trade in secondary for a quick buck.
Of course, fast money’s quick in-and-out does provide some semblance of secondary liquidity, but it’s the buy and hold investors that are the bedrock for a deal’s success.
Sure, these investors aren’t likely to provide secondary turnover if they buy and hold to maturity — exacerbating the market’s illiquidity — but they have supported the product through markets thick and thin.
Recent covered bond bookbuilds have appeared from the outside less exuberant than those earlier this year, but orders are still granular and well spread around the world.
Fast money's loss is real money's gain. The regulatory benefits and promise of longer term returns that covered bonds offer real money investors might not be what fast money wants.
But bank treasurers should not fret — covered bonds still retain their appeal. Their beauty remains, in the eye of the real money bondholder.