Market making in the interbank market in European covered bonds has been shut down for the rest of the week, to prevent spreads widening and volatility growing.The European Covered Bonds Council's (ECBC) 8-to-8 Market Makers and Issuers Committee, which was set up in late September to deal with market volatility, announced yesterday "interbank market-making should be suspended temporarily until Monday, November 26". The committee will meet again before noon on Monday, after collecting feedback from other market participants, to decide whether to reopen trading.
The committee took the decision "in light of the current market situation and to avoid undue over-acceleration in the widening of spreads", it said.
The covered bond market is dominated by German issuers, and had a total outstanding volume of €1.9 trillion at the end of last year, according to the ECBC. The 8-to-8 committee represents the eight largest market-making banks and the eight largest issuing countries in the covered bond market. They are based on securities such as residential mortgages, but are considered superior to mortgage-backed securities because they also give the holder a claim on the issuer in the event of default.
The market in the bonds has become increasingly uncertain - earlier this week Allied Irish Bank's mortgage branch postponed a covered bond issue, citing "extreme volatility in the credit markets".
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