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Covered Bond Blog: The dollar market wins

07 August 2015
Richard Kemmish

The first Singaporean covered bond should have been a cause for great celebration. After many years of working to overcome significant but very technical factors one of the world’s most advanced economies is finally joining the covered bond party.
The, in my view wrong, detractors pointed to the slightly unexpected choice of a 3 year US dollar deal for the debut. Five years is the traditional debutant’s maturity – everyone can buy a five year.

More importantly: ‘hey guys, this is a euro market, dollars are just a side show’. Investment banks only started to develop the market for dollar covered bonds for niche reasons: issuers with too much to do for the euro market (remember those days?), because of all of the dollar assets in my pfandbrief portfolio (remember those days?), because US investment banks were so desperate to break into the covered bond market that they had to play to their USP (and again).

Now that spreads are so artificially squeezed in the euro market by the ECB programme, new issue volumes are so low and dollar assets in cover pools virtually extinct, thanks but we really don’t need you dollar covered bond investors anymore. We’ll get back to you when we need you next.

I disagree. Until the European Commission comes to its senses and grants preferential treatment to high quality covered bonds that just happen to not be from the EEA, and until the ECB buying programme follows suit (which will never happen. Instead, until the ECB stops distorting the market in this way, so, next September), then Singaporean covered bonds in euros will always be disadvantaged. Unfairly.

From the point of view of credit quality, structure and risk diversification there is no reason why Singaporean covered bonds shouldn’t enjoy the tightest spreads in the market. But as long as technical factors hold them back they won’t. The same can of course be said of the Canadians and Aussies.

Why be a second best euro covered bond when you can be in the top category in dollars?

There is plenty of precedent to suggest that, given the conservative nature of the covered bond market, relative value perceptions once established are incredibly difficult to change. For British covered bonds it took the best part of a decade to shake off the idea that they were in some way ‘peripheral’ to the real covered bond market. The technical factors that initially established that position were removed just five years in. No matter, the perception lingered.

Instead, DBS have positioned their covered bonds relative to Canadian benchmarks, so in the top tier of dollar covered bonds. When technical factors stop holding them back that positions them nicely to price far tighter in euros than they would have done if they had chosen the currency for their debut.

Nothing wrong with frustrating euro land covered bond investors. Don’t let their sour grapes detract from the celebrations for a great debut. Bring on number two.

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