SSAs and covered bonds - Finans Norge · SSAs and covered bonds ... RED indicates EUR is favorable...
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SSAs and covered bonds Global trends and potential consequences for covered bonds (and more) Uffe Kalmar Hansen, Senior Analyst Oslo 19.1.2017
Transcript of SSAs and covered bonds - Finans Norge · SSAs and covered bonds ... RED indicates EUR is favorable...
SSAs and covered bonds Global trends and potential consequences for covered bonds (and more)
Uffe Kalmar Hansen, Senior Analyst
Oslo 19.1.2017
Agenda Global trends and covered bonds
- Status on ECB QE and CBPP3
- Impact from Trump and Japanese QE
- Impact from Brexit?
- Forthcoming regulation
2
Status on ECB QE
A year of politics…
4
What What's at stake
June? Early elections in Italy? Italy could end up with a euro-sceptic government
15 Mar Netherlands: general elections
NL could end up with a euro-sceptic government. PVV
(Freedom Party) calls for a referendum on EU
membership
23 Apr /
7 May
France: presidential elections
(and parliamentary elctions on
11/18 June)
Le Pen unlikley to win, but polls might underestimate her
chances. She has promised a vote on France's EU
membership and the return to national currencies
Sep Germany: general electionsProbably one more term for A. Merkel, likely with the
Social Democrats. Euro-critical AfD to enter parliament
Moreover: France still in a state of emergency
Belgium on terror alert level 3 (out of 4)
Greece: new elections?
UK to invoke Art. 50 of the EU Treaty (initiating the withdrawal) at some point, probably in March 2017
Turkey and EU to become unfriends?
Russia and EU to remain unfriends?
… Source: Nordea Markets
Timeline of political risk events 2017When
2017
CBPP3 was extended – but watch out
• We have seen months with very low
supply (EUR 0bn), and accordingly
very low purchase amounts by the
CBPP3.
• It is difficult to se that the CBPP3
should have been a catalyst spurring
supply.
• In addition if CBPP3 purchases keep
falling, or stay low then why not close
the programme?
• The current purchases are not material
to the APP total, and have minimal
impact on the market.
• The CBPP3 can buy directly in primary
markets up to the a level of 70% of an
isin.
5
0
2
4
6
8
10
12
14
04/J
an
18/J
an
01/F
eb
15/F
eb
29/F
eb
14/M
ar
28/M
ar
11/A
pr
25/A
pr
09/M
ay
23/M
ay
06/J
un
20/J
un
04/J
ul
18/J
ul
01/A
ug
15/A
ug
29/A
ug
12/S
ep
26/S
ep
10/O
ct
24/O
ct
07/N
ov
21/N
ov
05/D
ec
19/D
ec
02/J
an
EURbn Weekly supply
Euro area Non-Euro area Avg sweekly supply YTDSource: Bloomberg, Nordea Markets
0
2
4
6
8
10
12
14
Nov
-14
Dec
-14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Apr-
16
May
-16
Jun-
16
Jul-1
6
Aug-
16
Sep-
16
Oct
-16
Nov
-16
Dec
-16
EURbn CBPP3 monthly purchases
Primary Secondary Total
Spread developments major markets
6
-15
-10
-5
0
5
10
15
20
25
Bp ASW spreads
FI NO SE DE NL FR Source: iBoxx, Nordea Markets
French covered
bonds have relatively
suffered the most in the
wake of US elections
Japanese purchases have supported FRTRs
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Japan has been a net
buyer of long French
government bonds. After
the US elections yields in
the US have risen more
than in Europe shifting
relative value.
Possible impact from Brexit
• From the EIB statutes
• The UK has a 16.11% share of the subscribed capital, and is among the highest rated.
8
GBP spread development
• The Brexit vote (23 June) did not have
any material impact on EIB spreads on
EUR bonds.
• This was of great importance for the
funding programme of EIB.
• EIB’s front loading in 2016 was larger
than in 2015.
• Looking at GBP yields and spreads we
did find hightened volatility around the
vote.
• GBP bonds could therefore be more
volatile, with a possibility of contaigon
into other EIB bonds.
• We continue to find uncertainty
connected with EIB as Theresa May has
said she will trigger article 50 end of
March 2017.
9
Funding perspective: GBP has become an attractive
• EUR vs. USD > USD is preferred below 5-years, and EUR above
• EUR vs. GBP >>> GBP is preferred below 5-years, but less so than after hard Brexit message
10
SSA barometer EUR vs USD (shown vs EUR in bp)
Name/maturity 2 3 4 5 6 7 8 9 10 11 12 13 14 15
EIB -16 -11 -8 -5 -2 1 4 8 11 14 17 21 24 28
KFW -12 -6 -2 0 1 3 4 4 4 3 3 3 3 3
RENTEN -25 -19 -13 -7 -2 3 3
CADES -9 -7 -4 0 4 7 5
NRW -19 -12 -4 6 15 20 20
Source: Nordea Markets, BloombergThe above is based on generic curves incl. basis into EUR 6m (USD curve minus EUR curve).
RED indicates EUR is favorable for issuers, while GREEN indicates USD.
FRTB – Credit Spread Risk
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Risk weights for credit spread risk
Bucket number Credit quality Sector Risk weight Comment
1 AllCentral government, including central banks, of
a Member State0.5% Government bonds
2
Central government, including central banks, of
a third country, multilateral development banks
and international organisations referred to in
Article 117(2) and 118
0.5%Supras (multilateral
development banks)
3Regional or local authority and public sector
entities1.0%
Local government
bonds and PSE's (SA's)
4
Financial sector entities including credit
institutions incorporated or established by a
central government, a regional government or a
local authority and promotional lenders
5.0%
5
Basic materials, energy, industrials,
agriculture, manufacturing, mining and
quarrying
3.0%
6
Consumer goods and services, transportation
and storage, administrative and support service
activities
3.0%
7 Technology, telecommunications 2.0%
8Health care, utilities, professional and technical
activities1.5%
9Covered bonds issued by credit institutions in
Member States2.0% Norwegian are included
10Covered bonds issued by credit institutions in
third countries4.0% UK if Brexit
Source: The EU, Nordea Markets
Cre
dit q
ualit
y st
ep 1
to 3
Baa
3/B
BB
-/BB
B- (
M/S
/F)
Overview of the
CSR risk weight
table and major
categories.
Notice the large
difference
between govies
and covered
bonds.
SA vs IMA…
0
50
100
150
200
250
300
350
400
450
Govie's Supra's SA's EU covered(NO incl)
Non EUcovered (AU,NZ, CA, UK)
Basi
spoi
nt in
crea
se n
eede
d to
cov
er C
SR
(Ass
umin
g 10
% c
apit
al r
etur
n )
Basispoints needed to cover CSR in FRTB
Bond duration = 2Bond duration = 5Bond duration = 10 Source: CRR/CRD IV Review, Nordea Markets
FRTB – the CSR on bond segments (SA)
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Looking SOLELY at
the CSR do notice the
large difference
between bond
segments, and that
the charge increases
with maturity.
Duration x CSR x eROE
10 x 0.5% x 10% = 0.5% (50bp)
-20
0
20
40
60
80
100
120
140
160
0 2 4 6 8 10 12
G-s
pre
ad
Covered vs local govt
CRH (FR) ABNANV (NL)NDASS (FI) DB (DE)EU covered (NO incl) Source: Nordea Markets
FRTB – the CSR relative to the current covered bond g-spread
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The CSR cost rises
with maturity which
goes against what we
today see in markets.
The discrepancy
between the market
and CSR at the long
end of the curve is
material.
