Abbey abandons covered bonds issue as market closes

by Gill Montia

Story link: Abbey abandons covered bonds issue as market closes

Abbey has been forced to abandon a new issue of bonds, after interbank trading of covered bonds was suspended yesterday.

The covered bond market is currently an important source of liquidity for banks because covered bonds are regarded as very safe securities.

They are not only secured against quality mortgages but also allow the investor a claim against the issuer.

For this reason they have been one of the few sources of new funding for banks since the credit squeeze began in the summer.

Yesterday, the European Covered Bond Council, which is based in Brussels, suspended market-making of covered bonds until at least Monday of next week.

The Council is an industry group that represents securities firms and issuers, and the move is intended to ensure stability in the covered bond market.

There Council referred to concerns about “undue over acceleration in the widening of spreads”, by which it means the interest rate on the bonds and rates on government securities.

Rates on government securities have increased sharply in recent days, resulting in a fall in the price of covered bonds.

Abbey, which is owned by Santander, has reported that while it has explored the possibility of raising capital through a covered bond issue, it had found very poor investor appetite.

According to an Abbey spokesman “the market for securities backed by UK mortgages is very, very poor at the moment”.