Hedge Fund Investments Propel European Primary Covered Bond Market
In recent weeks, the European primary covered bond market has been riding the wave of a surge in activity, largely spurred by hedge fund investments, predominantly UK-based funds employing cross-asset strategies. These funds have become significant contributors to the order books for new covered bond issues, thereby influencing the success of these transactions.
Crédit Agricole Italia’s Successful Issuance
A standout instance of this trend is Crédit Agricole Italia’s issuance of a 500m 3.5% July 2033 green Obbligazioni Bancarie Garantite (OBG), which attracted a staggering 4.5bn in orders. The bond was issued at a spread of 90 basis points over mid-swaps, aligning with the trading range of the French parent bank’s senior preferred bonds and creating an arbitrage opportunity for investors seeking relative value.
Smaller Italian Banks Also Benefit
This trend has also proved beneficial for smaller Italian banks, such as Banco Popolare di Sondrio, which issued a 500m 3.25% July 2029 OBG at a favorable rate of mid-swaps plus 77 basis points, attracting 900m in orders without any concessions. This contrasts sharply with covered bond launches from German and Austrian issuers, which have received a more lukewarm reception this year.
Altered Dynamics of European Bank Bond Investment
The influx of cross-asset buyers into the OBG market has significantly altered the dynamics of European bank bond investment, traditionally segmented by bond class. Covered bonds, often seen as a fallback option for bank treasurers, are now also considered an attractive option in favorable market conditions.
Italian banks, in particular, seem to have adopted the strategy of capitalizing on the current demand rather than waiting for difficult times. This strategic shift underlines the transformed perception of covered bonds, from a bank treasurer’s ‘rainy day’ product to a viable ‘sunny day’ product, especially when investors pile in hoping for tightening against other FIG products.