Portugal

The euro primary market remained closed on Monday. The secondary market, however, has been more active, with liquidity present for both core and peripheral paper. Even Portuguese bonds have enjoyed interest, as fast money accounts salivate over double digit yields.

A senior DCM covered bond banker talks to The Cover about the market outlook for the next six weeks which, aside from the sovereign crisis, will also encompass legislative progress on bank resolution regimes, new developments on CRD 4 and how these might impact the covered bond market.

Dealers and investors remain shell shocked by recent events. Despite relatively upbeat comments from the buy side and a continuation of the spread correction, reported secondary activity has been muted. Syndicate bankers are looking towards stabilisation of the Bund/swap spread and do not rule out the prospect of issuance, though it may be limited to taps.

The covered bonds of Portuguese and Irish banks are drawing ever closer to sub investment grade status, though they are likely safe for the summer. Moody’s on Tuesday cut Ireland from Baa3 to Ba1 and assigned a Timely Payment Indicator (TPI) of Very Improbable to all Portuguese mortgage backed covered bonds. Some banks are rated only by Moody’s, though should the sub investment rating Rubicon be crossed, analysts expect the ECB to alter its criteria for repo eligible collateral.

Secondary market dealers reported little trading activity on Tuesday and described the market as being dysfunctional. Despite that, some participants are trying to take advantage of this price opacity. After opening very weak, the market has bounced back on rumoured central bank intervention.

Though the covered bond market remained quiet on Thursday, syndicate officials stressed it had not yet closed for summer. Investors still have cash to put to work, and there is at least one trade expected next week. Negative rating action has damaged market sentiment, however, and closed the window for some peripheral names. Prospective issuers face a forbidding market and increased premiums should they decided to issue.

Crédit Mutuel CIC launched its debut Obligations à l'Habitat on Tuesday, taking supply in the new French format since last Friday to Eu3.8bn. The borrower managed to find a secure window for issuance in a market plagued by negative rating actions to print a benchmark deal in line with its own curve, and that of the wider French market.

Moody’s placed mortgage backed covered bonds issued by Banco Santander Totta (BST) on review for possible downgrade on Friday, after placing BST on rating watch negative on June 9.

As a proxy for national mortgage markets, LBBW research has taken a closer look European mortgage pool statistics and macro-economic housing market trends. Controversially, it finds that Spanish NPLs have halved in the last two years. In contrast Scandinavia, which is stereotyped as safer than safe, could be heading for trouble as house prices reach 30-year highs.

The eurozone sovereign debt crisis has tested the covered bond product like never before. Katie Llanos-Small examines how covered bonds from the periphery have performed during the crisis, and asks what might happen if a eurozone sovereign were to default.

Secondary market activity has been focused on Spain lately with end account selling noted in multi-cédulas and single names which, among others, have included BBVA. Though it’s technically possible for the issuer to bring a deal flat to the underlying government, some bankers think that the funding window may have passed, albeit temporarily.

Moody’s took rating action on the covered bonds of three issuers on Monday, downgrading the deals issued by Santander Totta, and Caxia Geral de Depósitos, while placing those issued by Marfin Popular Bank on negative review.