Central banks have been a boon for the global capital markets, stepping in to provide extraordinary liquidity that has buoyed assets across the board. After years of treading water, equities have rallied. And bond issuance has turned into a bun fight, with investors scrambling over each other to pick up even the slimmest yields – a state of affairs that has suited cost-conscious issuers just fine indeed.
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Having been intermittently locked out of the covered bond market for 2012, peripheral banks in Italy, Spain, Portugal and Ireland now have full access and can often fund through their government curve. While this seems to signal that they are on their way to regaining a firm footing in the capital markets, the cheapness of ECB funding is still proving a very attractive alternative.
Spain is one of the largest covered bond markets in Europe while Ireland is one of the smallest, but they face the same challenges – being overshadowed by central bank liquidity programmes, which may be set to keep spreads tight and issuance low for the foreseeable future.
SME covered bonds offer an opportunity to cut funding and score political points. ABS will offer competition, but having made the tough journey from concept to test case the cost saving is clear and more deals are set to follow in Commerzbank’s wake as banks sweat their assets.
The Nordic covered bond markets are among the oldest and most respected in the world. But for an asset class that prides itself on a dependability that borders on the boring, falling house prices and persistent regulatory debates have injected a little excitement into the Danish market.
Pfandbrief issuance inevitably slowed as pricing squeezed ever tighter making it increasingly difficult to seduce investors. With yields and spreads seemingly past their lows, deal activity looks to be on the rise with new deals on the road.
A super-safe asset class that has survived the last six years with its 200-year old reputation intact still needs protecting. Covered bonds have been bullet-proof so far, but all parties need to be alert to the unintended consequences of a flurry of regulatory action.
Morocco looks set to become the first African country to introduce a covered bond market – a testament to the regional maturity of the country’s financial system.