The hit to liquidity suffered by the covered bond market in September threw the market into disarray. The only prevailing opinion seems to be that no one knows what’s going on, or what the eventual cost to the market will be.
Different sectors of the covered bond market are reacting in different ways but as issuers at last began to contribute to the trickle of issuance following the traditional late-summer break, the self-proclaimed market leader has proved to be anything but.
While Pfandbrief market participants have been busy assuring everyone that the 200-year old product is an island of calm in the tumultuous seas of today’s financial markets, the sheer lack of issuance has given the lie to this claim. As any covered bond banker will explain, bold issuance is needed to resettle the covered bond market, and the core markets, such as the Pfandbrief, need to stabilize before the new markets can reopen.
But Pfandbrief issuers have so far refused to take on that role, leaving the younger markets, inexperienced in weaker credit environments, to fill the void.
In the UK, HBOS was ready to price its €2 billion, three-year UK covered bond deal at around five basis points over mid-swaps, before having its thunder stolen by Nationwide announcing price guidance of 11bp to 12bp over mid swaps for its own benchmark €1 billion issue.