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Still big, but more sensitive

The jumbo Pfandbrief was designed to attract international investors to what had been largely a domestic German debt instrument. Until recently, though, it was being marketed as if Germans were the target. Non-Germans want clearer pricing information, conventional credit ratings and more warning of upcoming issues. Some issuers are responding, not least because the Pfandbrief looks like being Germany's main contender in European debt markets when a single currency is instituted. Antony Currie reports.

Newcomers to the herd

It used to be hard to find anyone in the financial markets prepared to criticize the Pfandbrief. Analysts would continually extol the virtues of the second-largest bond market in Europe for its generous yield pick-up on German government bonds, for having the backing of practically risk-free loans to the German Länder (states) or to a pool of high-quality mortgages, and for not having suffered a default this century.

The only shortcomings mentioned were its lack of liquidity and transparency. That meant it was characterized as something peculiar to the German domestic debt market. Deemed unsuitable for export, on average only 10% of the paper was sold to investors outside Germany.

The development of the jumbo Pfandbrief in 1995 was an attempt to change that. Any Pfandbrief issue of Dm1 billion ($649 million) or more offering a fixed rate of interest and with at least three market-makers in the dealer group was henceforth to be classified as a jumbo. The consequent increase in liquidity and transparency was expected to persuade international investors that they had been missing out on an excellent opportunity. At least that was the plan.

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