Covered Bond Issuance Surges in Europe as Borrowing Costs Fall

Unione di Banche Italiane SCPA and Commerzbank AG are among lenders marketing a total of 4.25 billion euros ($5.8 billion) of covered bonds in Europe today, boosting monthly sales of the debt to the most since July 2012 as borrowing costs approach a record low.

The Italian lender issued 1 billion euros of securities backed by mortgages while Germany’s second-largest bank sold 500 million euros of notes backed by public sector loans, according to data compiled by Bloomberg. The average yield on euro-denominated covered bonds fell 19 basis points this month to 1.4 percent, four basis points from a record low reached May 17, according to Bank of America Merrill Lynch index data.

Covered securities are attractive to investors because they will be exempt from European rules requiring bondholders to help absorb bank losses. That favorable regulatory treatment is combining with a second year of negative net supply to suppress the yield premium on the secured notes over government bonds.

“I expect more demand for UBI’s bonds than for Commerzbank’s because the latter should be priced extremely tight versus swaps in a historically low yield environment and absolute yields remain a key topic for investors,” said Bernd Volk, head of European covered bond and agency research at Deutsche Bank AG in Zurich.

UBI’s covered bonds were priced to yield 118 basis points more than the mid-swap rate while Commerzbank offered no premium over the benchmark. The Frankfurt-based lender’s existing 500 million euros of 1 percent covered bonds are trading at about 9 basis points more than swaps, Bloomberg data show.

Intesa Sanpaolo SpA, Italy’s second-biggest bank, is issuing 1.25 billion euros of notes maturing in February 2026, a person familiar with the matter said. The securities will be priced to yield 108 basis points more than the mid-swap rate.

Banque Federative du Credit Mutuel SA sold 1.5 billion euros of five-year covered bonds backed by residential home loans, another person said. The French bank, which issued the notes through its Credit Mutuel CIC Home Loan SFH unit, offered a spread of 14 basis points.

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