Covered Bond Sales Surge in Europe as Yields Fall to Lowest in Five Years
Covered-bond sales climbed more than eightfold in Europe this week to 8.2 billion euros ($10 billion) as issuers took advantage of the lowest borrowing costs in almost five years to raise funds.
ING Groep NV, the biggest Dutch financial-services company, and Norwegian lender DnB NOR Bank ASA led the most issuance in five weeks as yields on covered debt fell to the lowest since September 2005, according to Bank of America Merrill Lynch index data. ING issued 2 billion euros of five-year notes and DNB Nor raised 1.5 billion euros issuing 2017 debt.
The cost of borrowing for covered bond issuers dropped to 2.77 percent, down from 3.23 percent on July 26, index data show, equivalent to 145 basis points over government bonds, according to the Merrill Lynch index. The notes typically get the top credit ratings because they’re backed by mortgages or state-sector loans as well as being guaranteed by the borrower, making them a higher-yielding alternative to government securities for investors.
“Covered bond issuers are now rushing to the market as absolute yields are extremely low,” said Jose Sarafana, the Paris-based head of covered-bond strategy at Societe Generale SA. “Investors are looking for some spread pick up over government debt.”
Yields on German 10-year government are near a record low on speculation central bank policy makers will increase support for the global economy to ward off a double-dip recession.
ING Bonds
Amsterdam-based ING on Aug. 23 issued top-ranked investment-grade securities due 2015 with a spread of 91.5 basis points over German government bonds, according to data compiled by Bloomberg.
DnB NOR’s seven-year notes, ranked AAA by Standard & Poor’s, were priced at a spread of 71.9 basis points on Aug. 24. They now trade 0.9 basis points tighter at 71 basis points more than government debt, generic prices on Bloomberg show.
Sales of covered debt jumped 53 percent so far this year to 224 billion euros, compared with 146 billion euros in the same period last year.
Austrian lenders Bawag PSK Bank and Erste Group Bank AG also tapped the market this week, while Bradford, England-based lender Yorkshire Building Society is meeting with covered bond investors starting Aug. 30, according to a banker with knowledge of the roadshow.
“If the market environment remains firm, then covered bond sales should be steady for the rest of the year with banks in focus as they’re looking to refinance,” said SocGen’s Sarafana.
Peripheral Debt
Banco Espanol de Credito SA, a retail-banking unit of Spain’s Banco Santander SA, yesterday tested investor appetite for so-called peripheral market debt.
The Madrid-based lender raised 600 million euros of five- year covered notes priced to yield 190 basis points more than the benchmark midswap rate, or 234.8 basis points more than government bonds. The bank paid a spread of 71.3 basis points more than state debt when it issued 1.25 billion euros of 3 1/2- year covered bonds in September 2009, Bloomberg data show.
Banks also issued senior unsecured debt this week, with Danish lender Sydbank A/S selling 1 billion euros of two-year floating-rate notes and SEB AB, the second-largest bank in the Baltic countries, raising 750 million euros from the sale of five-year bonds.
Corporate Issuance
Company bond issuance plummeted 67 percent this month to just 14 billion euros, the slowest August since 2003, according to Bloomberg data.
The only non-financial issue of the week came from Renault SA, France’s second-largest carmaker, which sold 500 million euros of two-year notes. The securities were issued through its financing unit and priced to yield 160 basis points more than midswaps, or 234.3 basis points relative to government debt.
The extra yield investors demand to hold investment-grade company bonds rose 1 basis point this week to 178, the highest spread in one month, according to Merrill Lynch index data. The index that tracks 1,728 corporate bonds tightened 26 basis points in July.
“After a substantial rally since mid July, we believe spreads are likely to pause here before beginning to tighten again in September,” Barclays Capital credit strategists, led by Matthew Leeming in London, wrote in a note to investors today. “Beyond the very short term, perhaps one to three weeks, we believe a short squeeze for bonds will materialize.”
To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.net;
Rate These Stories
Rate this Page