After a record 2010, covered bond supply is expected to drop in 2011 as banks begin to choose other alternatives, Societe Generale analysts said.

Volumes reached an all-time high in 2010 with €185 billion ($247 billion) of issuance, but that number is expected to decrease by €20 billion.  

"Low interest rates have forced investors to look for pick-up, which has sparked more demand for covered bonds," SocGen analysts said.  "For 2011 there are several factors that will limit supply."

Issuers will have more options next year as other funding alternatives become available. "For one, the basis swap can be attractive," SocGen analysts said. "Some issuers now need to attract a broader investor base given that a number of European investor accounts are restricted on the amount of paper they can buy of some names."

So far, the analysts said that French and Nordic issuers have the best developed plans to cross the Atlantic. Additionally, RMBS has come back, they said, and has once again become a valuable funding alternative for U.K. and Dutch issuers.

In Spain, the covered bonds of the major banks trade very closely to senior unsecured spreads. As a result, these issuers will tend to issue senior paper instead of Spanish covered bonds or Cédulas. This is because investors do not attach enough value to the collateral within the Cédulas. Issuance from other credit institutions might also be hampered by volatile headline news, SocGen analysts said.

They expect more sovereign mini crises in 2011 that will limit the capacity of banks located in the riskier countries to sell paper.  




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