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Covered bonds: Run takes wind out of cédulas’ plain sailing

If a product swamps a market, prices go down. Yet this basic economic tenet seems to have eluded many of the issuers in the Spanish covered bonds market. How else to explain the consistent lack of coordination in issuance endemic in the world of the cédulas?

Talk to market participants and they will point to the period in late March and early April when three 15-year cédulas were launched in quick succession, which pushed spreads progressively wider. The bonds underperformed and inventory was left on the leads’ books.

Crowded house

More recently, Caja Madrid, BBVA and AyT were all set to crowd into the market with covered bonds maturing in 12 years. Although Caja Madrid went ahead with the launch, and the AyT launch is planned for June 1, BBVA was evidently not keen to see its spreads widen unnecessarily. It scrapped its 12-year tranche, due a week after the Caja Madrid cédula, and concentrated on a six-year tranche instead. Although some have applauded Caja Madrid for its pricing – 11 basis points over mid-swaps – as sensible, and the BBVA move is generally regarded as prudent, one still has to ask why the three bonds were scheduled to come to market at such short intervals? The question becomes more poignant if one considers a four-week lull in primary covered bond market that followed the launch of the 15-year cédulas.

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