Tight pricing and duration is on offer in the euro senior unsecured market for financial institution borrowers, making the product look like a highly attractive alternative for an underwhelming (and closed) covered bond market.
As a result, covered bonds should be an afterthought for any benchmark issuer looking to load up on funding before Christmas.
Euro covered bond conditions have soured in the 15 days since BPCE sold the last trade in the format — a €1bn 2.75% February 2030 mortgage-backed note at 46bp over mid-swaps.
Since then, the 10 year Bund-swap spread has turned negative for the first time as German govvie yields rose at a greater pace than swap rates. And as a result, SSA bond spreads versus swaps have been dragged wider, in turn putting covered bonds under pressure.
For instance, as of Tuesday afternoon, BPCE’s deal was bid at an I-spread of 54bp, according to Tradeweb, some 8bp back of reoffer.
And although SSA conditions appear to have started settling — as the EU’s dual tranche syndication showed on Tuesday — the same cannot be said about the covered market, which at present remains shut.
However, the tone is markedly different in the unsecured financials segment where senior deals have been met with riotous attention. This part of the market is wide open and attractive — and looks to remain so until early December.
The unsecured market received a post-US election boost as Donald Trump's uncontested win took a large chunk of uncertainty off the table and credit rallied.
Why go wide when you can go tight?
For any FIG issuers hoping to get some pre-funding or liquidity on board, it might prove prudent to put any hopes of a covered trade to one side and look at diving into the unsecured market.
Conditions are clearly great, even with Tuesday's wobbles over the war in Ukraine souring sentiment, and investors look to have plenty of cash thar needs putting to work before the year ends.
FIG benchmark bonds issued November’s post-US election burst of euro senior unsecured supply have been on average more than three times covered, according to GlobalCapital’s Primary Market Monitor, with the final books averaging just over €2.3bn.
And this is despite the tight levels on offer.
National Bank of Greece, for instance, sealed a €650m 3.5% November 2030 non-call 2029 green senior preferred print at 130bp over mid-swaps last Tuesday, landing 30bp inside of initial price thoughts.
The Greek bank managed to push the spread 5bp through fair value on its first deal as an investment grade issuer, according to the lead managers. Demand for the note closed at over €3.75bn.
And on top of this, tight senior levels are starting to encroach closer and closer to covered bonds.
For example, Jyske Bank priced a €500m 2.875% May 2029 non-call May 2028 senior preferred bond — rated A+ by S&P — at 70bp on October 29. As of Tuesday afternoon, it was trading at bid I-spread of 77bp, according to Tradeweb.
This level is just 38bp wider than where its closest comparable tenor euro covered benchmark — the €500m 1.875% October 2029, issued at 14bp in August 2022 — was quoted on Tradeweb, meaning that the four additional rating notches saves just under 40bp.
With covered bonds trading so wide and senior so tight, it would make sense for bank treasuries to fund using the latter.
Tenor talk
Perhaps, more crucially is where issuers can fund, rather than what they can fund.
Unfortunately for prospective covered funders, supply has been trending shorter since August. The average tenor for a euro benchmark covered was 4.7 years in October, down from 5.2 in September and 5.1 in August, PMM data shows.
But these tenors are not where covered collateral is best used. The belly of the curve is strong in senior unsecured — so why waste your cover pool when better alternatives are available?
Covered funders have struggled to secure duration in recent years, aside from brief windows where tenors up to 15 years have been available to a small number of borrowers.
Although, with rate cuts on the horizon, some might start to hope that the prospect of loading up on duration returns some time next year. However, this is unlikely to materialise in the near term as the Bund-swap spread and long dated SSA levels pile pressure on covered bonds.
Of course, while it would be nice to tie up covered collateral in long dated trades, there just is not the need as the unsecured financial market has shown that deals are available across the curve.