What’s a cautious fixed-income investor to do these days? Now, there are even worries about covered bonds, which are backed by mortgages or public sector debt but seen as ultra-safe thanks to guarantees by the issuing bank.
On Wednesday, Abbey, the UK arm of Spain’s Santander, became the third bank in a week to pull the sale of a mortgage-backed covered bond deal, as the market-making obligations of European banks in the roughly €1,600bn market were suspended until Nov 26, reports the FT on Thursday.
Allied Irish Banks and Ahorro y Titulización, a business controlled by Spanish savings banks, have both pulled covered bond deals in the past week.
Amid poor investor demand and higher spreads that have increased volatility in the normally sedate market, the European Covered Bond Council, an industry group representing securities firms and borrowers, on Wednesday announced the suspension of interbank market-making obligations until Monday to try to slow the fall in prices.
Banks will still make markets for investors, just not among themselves.
Banks including Barclays Capital, HSBC and UniCredit took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50bn disclosed, Bloomberg reports on Thursday.
“We are in a deteriorating situation,” Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, told Bloomberg. “A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.”
According to Bloomberg, Arnd Stricker, a management board member at Corealcredit, the German commercial property lender owned by Lone Star Funds, said at a conference in Frankfurt that covered bonds are “being thrown in the same basket” as mortgage securities, even though they are safer.
More worrying, “without market-making between banks, investors will shun the sales of new covered bonds”, Santiago Rubio, who oversees 14bn euros ($21bn) of assets as head of fixed income at La Caixa’s asset management arm in Madrid, told Bloomberg.