Covered Bonds Continue to Surge--Update #1

[Adds information on new Deutsche Bank and BNP Paribas issuances]

While the non-GSE securitization market remains moribund in the US (and elsewhere), the covered bond market has sprung back to action as a vibrant funding source in Europe—and seems to be staying that way.

Before May 7, there had already been some positive signs.  But on that day, the European Central Bank's (ECB's) announcement of plans to purchase €60 billion (USD $84.8 billion) in covered bonds "clearly opened up the issuance market for covered bonds" (José Safarana, fixed income analyst at Société Générale, quoted by Dow Jones Newswires).

Between May 7 and May 19, the covered bond market priced 36 covered bond deals totaling €9.6 billion (USD $13.6 billion), according to the Financial Times (citing Dealogic).  That approached the total for the entire month of April (€10.6 billion, or about USD $15 billion).

Issuances May 7 - 19 included the first (and second) public issue of Spanish covered bonds (cédulas hipotecarias) in nearly a year, along with substantial issuances from financial institutions in Belgium, France, and Germany.

And more covered bond issues keep rolling out.  Here is a partial list covering May 19 - 29:

• Banque Federal des Banques Populaires (France)—€1 billion (USD $1.4 billion)

• ING Groep (Netherlands)—€1.25 billion (USD $1.8 billion)

• Dexia Kommunalbank (Germany)—€1 billion

• Banco Español de Crédito (Spain)—€1 billion

• Erste Bank (Austria)—€1 billion

• Swedbank (Sweden)—€1.25 billion

Most recently, Deutsche Bank Tuesday (June 2) priced a €1 billion, seven-year issue at 55 basis points over mid-swaps.  On the same day, BNP Paribas undertook to sell a an €1 billion, five-year covered bond with a cover pool of public sector obligations.

All this activity has transpired without the ECB actually spending a single cent on covered bonds under the planned purchase program.  The ECB has not even announced details of the program, which are expected to be revealed June 4. 

Moreover, the €60 billion sum that the ECB plans to spend is relatively modest in the elephantine world of government stimulus programs.  It seems hard to imagine that the impact would have been so great unless the covered bond market was already set to move in a positive direction.

For Americans who are gauging the potential for covered bonds in the U.S., the current resurgence of the European covered bond market may be a further sign of the inherent strength and resilience of this funding vehicle.