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It's a long time

23 June 2014
Richard Kemmish

Congratulations to Nationwide for the first British 15 year covered bond for a very long time. Deals that long dated are always a sign of confidence, this time it is also a reflection of the absurdly low rates at the short end of the curve. When Irish government 5 year bonds yield below 1% (“No Father Dougal, this coupon is small, that coupon is far away”) you know that the only thing to do is go long where the combination of a higher coupon and roll down the curve ensure some kind of return.

Similarly the collapse of long dated issuance during the crisis was partially explained by a collapse in confidence (which always confuses me, if it’s going to go bust surely it’s going to do so in the next 5 years). But it was also due to the fact that the long end of the curve used to be dominated by the two countries that saw the greatest fall in issuance as a result of the crisis – Spain and the UK. Ten years ago most deals were from those two countries and the average duration of new issues was over 10 years with 20 years bonds being perfectly normal. Happy days .

I’ll ignore the famous CFF 50 year bond which frankly I always thought was just showing off.  

Received wisdom always used to be that German’s didn’t issue long in the public market because namenspfandbrief were always more cost effective and that Brits and Spaniards didn’t issue short because they had access to the RMBS market for their short dated funding needs. Almost every one of these assumptions is now under question.

More and more namens-other-covered-bonds are coming on stream as the German insurance industry gets fed up of its overly Germanic diet. And the advantage that issuers can get from this esoteric sub-market is diminishing, perhaps because of the competing supply.

At the same time the RMBS market (RMBS 2.0) seems to be longer dated now as mortgage repayment rates - which these bonds rely on for their average lives - have fallen so much with lower absolute rates.

Then there are a couple of new factors to consider.

Swaps are more difficult and expensive than ever as ratings fall, and credit departments become more aware of the ‘specifics’ of covered bond swaps. In particular for non-Euro based issuers, FX swaps are only going to get more difficult and more expensive, chipping away at the economic benefits of the long end. 

And then there is the growing importance of the NSFR for bank treasurers. An increasing number of issuers nowadays are having their maturity decisions, or even the entire rational for their covered bond programme, determined by their need to meet this ratio.
Yes, we will be seeing more long dated issues. But this time around the sector will be for very different reasons from last time.

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