Covered bonds: Storm clouds gather over covered bonds

The summer break is over and the covered bond market is preparing to receive the glut of issuance that traditionally follows it. But the situation this year is markedly different to previous years, as issuers attempt to account for a shortfall of some 30% in covered bond issuance this year over the same point in 2007. Accordingly, the weight of supply following the summer break is being felt earlier than in previous years. "This year, supply pressure started in mid-August," says Timo Boehm, portfolio manager at Allianz Global Investors. "It seems to us that some issuers are trying to be first to market, which might be the best strategy for them in this environment."

There are concerns that the covered bond investor base is ill equipped to take on the €20 billion of issuance that, according to Société Générale, is expected to materialize over the coming months. Only in the...