MARKET MOVER - BNP PARIBAS - Investment Services India

EUR Covered Bonds: Market Update
• Activity in the primary market has delivered
several good signs: despite the end of the ECB
CBPP, new EUR issuance has soared in
September and the average size is back to
almost EUR 1bn.
• After an easing in ASW around July/August,
mainly due to the summer lull, covered bonds in
peripheral markets have re-widened since late
August.
• STRATEGY: 1) Underweight Irish and
Portuguese covered bonds, which we expect to
widen further; 2) overweight Spanish and Italian
covered bonds which should start compressing
again; and 3) PGB 4y is priced cheaper than
Caixa Geral De Depositos Covered 4y (CXGD)!
CXGD/PGB 4y and BKIR/GILT 5y ASW
differentials should widen by at least 55bp and
44bp respectively.
Chart 1: New Issuance Soared in September
30
25
20
15
10
5
0
Nb. EUR Issues
New EUR Supply (bn)
Total EUR Supply incl. taps (bn)
2006 2007 2008 2009 2010
Source: BNP Paribas, Bond Radar
Chart 2: ASW have Re-Widened in Peripherals
Since Late August
350
350
The activity in the primary market has delivered
several good signs. According to Bond Radar, 23
new EUR covered bonds have been issued so far in
September, bringing monthly supply to EUR 22.4bn,
just EUR 5bn below the September 2009 level (Chart
1). Given that i) Sep 2009 was actually the heaviest
September supply and ii) Sep 2010 is close to those
levels even without the ECB’s buying force, this is
impressive and clearly demonstrates a significant reopening
of the covered bond market despite the end
of the ECB CBPP. Another positive development is
the recent increase in the average size of new
covered bonds. The latest had slumped to EUR
700m in May from EUR 1-1.3bn over the past year,
but is now almost back to EUR 1bn (EUR 974mn).
Furthermore, it is noteworthy that Spanish banks
have been able to re-enter the primary market, slowly
in July and August, and significantly this month with
five new bonds totalling EUR 4.5bn. Italian banks
have also been quite active in September with five
new bonds amounting to EUR 4bn, their heaviest
monthly supply so far this year.
However, the situation is different in Ireland and
Portugal where fiscal concerns and stress over Irish
banks are preventing banks from tapping the market.
Further, let’s remember that the latest Irish covered
bond goes back to November last year while the
latest Portuguese covered bond was issued in
March.
300
250
200
150
100
50
0
Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10
Spanish Cedulas Portugal Covered Italy Covered Ireland Covered
Source: BNP Paribas, iBoxx Covered Indices (4y-6y)
400
350
300
250
200
150
100
-50
Chart 3: PGB 5Y ASW Now Above the iBoxx
Portugal Covered Index ASW
50
0
iBoxx € Portugal Covered
-100
Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
Source: BNP Paribas, iBoxx
PGB 5Y
300
250
200
150
100
50
0
Camille de Courcel 23 September 2010
Market Mover, Non-Objective Research Section
29
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