Relax, covered bonds will be this way for a while
Tight spreads and a lack of differentiation between issuers are things of the past in the covered bond markets. But perhaps this is more “normal” than the bull market situation.
It has been another topsy-turvy month in the covered bond markets. In the first week of June Danske Bank issue a €1.25 billion, five-year mortgage-backed deal at 20 basis points over mid swaps. The Danish bank launched the deal with no pre-sounding, and had it all away within a day. But ECB president Jean-Claude Trichet’s hawkish comments on inflation shortly afterwards brought the market back down to earth, and big hits were taken by many investors, especially those sitting on shorter-dated paper. Except for a few public-sector issues from such names as Dexia and Bayerische Landesbank, the covered bond market has been mostly confined to taps and private placements ever since. It was another month that highlighted the overriding shift in this sector since the credit crunch: a move from a fluid, open market to one confined to sporadic windows of issuance.
But which of the two can be considered a normal market? A mistake that has been made by many is to presume that the environment that preceded the crunch was totally normal. However, it would be foolish to think that the past five years or so are the benchmark and that the situation we’re in now is an anomaly.