Euro covered bond funding started the year with a bang as issuers leapt into the market. Issuers rushed to take risk off the table as early as they could to avoid issuing during the US election in November. Banks placed €39.85bn in January — over €4bn more than they raised in the same month last year, data from GlobalCapital’s Primary Market Monitor shows.
Monthly euro covered bond issuance in 2023 and 2024
Euro benchmark covered bonds (€m)
Source: GlobalCapital’s Primary Market Monitor
Although issuance tapered off in February — only €14.5bn was raised, compared to February 2023’s €26bn — banks maintained a steady pace of issuance until the end of May. By that stage, they had placed €107.2bn of benchmark covered bonds, just shy of the €115.8bn raised by the same point last year.
The first five months of the year offered euro funders excellent conditions as investors flocked to the product, thanks to the attractive spreads on offer. January’s wave of supply was priced on average at 45.8bp over mid-swaps. February and March offered spreads in a similar ballpark, printing on average at 44bp and 42.7bp respectively. Over the same period, the average book size grew from €2.1bn in January to €2.7bn in February and €2.9bn in March.
Meanwhile, euro funders had to offer a 5.5bp new issue premium on average in January — the highest monthly premium of the year. However, by March demand had improved so much that banks were pricing covered bonds on average 0.8bp through their secondary curves.
Spreads continued to tighten throughout the second quarter, hitting 35.25bp in April and 34bp in May. Demand, however, was lower during this period, at €2bn in April and €2.2bn in May.
French fumble
Covered bond issuance cratered as spreads and premiums crept up in June and July as the fallout from the EU parliamentary elections and France’s snap election cast a shadow over the market.
Supply picked up in late June until mid-July, albeit at a lower level compared to last year. Banks placed €3.75bn of covered paper in July this year — exactly half the €7.5bn raised in 2023.
After spending three months hovering near zero, the average new issue premium more than doubled from 0.8bp in May to 1.8bp in June, before dropping to 1.25bp in July.
As issuance conditions soured after the summer, issuers opted to play it safe by issuing shorter dated covered bonds.
The year had started strongly. After scant opportunities to pick up duration in 2023, issuers jumped at the chance to balance out their funding. After almost six months without a deal of longer than 10 years, Crédit Agricole kicked off its funding programme with a €1.25bn January 2034 print on January 3, opening the doors for others to follow. A further 17 long dated deals, including five 12 year notes, were issued during the first quarter.
The appetite for duration peaked in early May as Caffil priced a €500m May 2039 note — the longest syndicated euro covered bond since June 2022. Furthermore, at 14.8 times covered, this was the most oversubscribed deal of the year so far by some margin.
However, demand soon dwindled. By June, banks were placing paper at an average tenor of 6.2 years, seven months shorter than the May average. The average tenor then dropped further in July to 5.4 years.
Average NIP and tenor for euro benchmark covered bonds
Source: GlobalCapital’s Primary Market Monitor
When supply restarted in late August, borrowers ventured even shorter. On average, banks printed at five years, rising slightly to 5.2 years in September before dropping to 4.7 years in October.
In fact, only one issuer braved the long end after the summer — Deutsche Kreditbank, which priced a €500m 2.75% October 2034 social housing mortgage covered note at 39bp over mid-swaps in late September. However, a 4.5bp concession was needed, 1.7bp more than the month’s average.