In early August, the VDP had said that it expected members to start quoting prices for all jumbo issues of two years or more at triple bid-offer spreads, regardless of what those spreads were. Dexia Kommunalbank had planned to launch a five-year, public sector Pfandbrief on September 1 but held back in case the resumption of market-making had a negative impact on the market. It did. Spreads across the yield curve widened by four to five basis points, and Dexia pulled its deal. Although it is far from the first time that a planned covered bond has been pulled since the credit crunch, a public-sector Pfandbrief from a big name such as Dexia is supposed to be the best of the best.
"This trade was clearly affected by the widening of German names because of the market-making [resumption]," says one analyst. "It’s certainly not to do with the credit. There’s nothing wrong with a five-year, public-sector Pfandbrief at eight over mid-swaps."
Anyway, many would argue that spreads on Pfandbriefe needed to widen slightly to come more in line with other covered bond markets. It would seem that the VDP was simply trying to get the market back on track. It is normal for market-making to resume in September following the summer break. But this is not a normal market. It is a very illiquid one, and imposing mandatory market-making in this environment has the effect of creating false liquidity, which can temporarily mask problems in the market but not solve them. "The [resumption of] market-making was pushed through by the VDP, rather than by people asking for it," says one covered bond head. "There was no incessant trading period following its resumption. German names were always going to get smashed."
The VDP could perhaps be forgiven for thinking that the market was ready for such action. Deals from Eurohypo (€1 billion, five-year mortgage deal at 10 basis points over mid-swaps) and Münchener Hypo (€1 billion, three-year public sector deal at mid-swaps minus one) both achieved success in the fortnight preceding September 1, and the VDP would have been close to both. (VDP president Henning Rasche is a member of the Eurohypo board, for example.) But the Dexia non-deal has shown that not even Germany is immune to the market’s problems, and this will be of substantial concern to covered bond participants as supply picks up in the coming months. The VDP was unavailable for comment.