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Pfandbriefe fail to outshine rivals despite quality

In a period of uncertainty, Pfandbriefe ought to flourish. Yet the German mortgage bond market is still slow, hit by adverse swap market conditions and credit concerns springing from radical restructuring among the German banks. Even so, rival breeds of covered bonds in France and Spain are doing well. And Ireland aims to create a superior legal framework to put Germany in the shade. Could this rivalry give covered bonds a much-needed shot in the arm?

Author: Tom Marshall

All year, German mortgage bankers have been assuring us that quality will always tell in the end. This in the face of new issues having been virtually non-existent for most of this year, and analysts consistently bearish on the asset class. But, the bankers insisted, next time the financial world was rocked by a disastrous, confidence-sapping event, the Pfandbriefe would suddenly come back into fashion because of their safety. Investors, it was argued, would flock to covered bonds, attracted by their long default-free record and yield pick-up over governments. It's hard to think of an event better suited to trigger this quest for safety than the recent outrages in the US. Markets around the globe scrambled into what one head of high-grade credit research called "a classic textbook example of a flight to quality". But there has been no sign that large volumes of money have moved into covered bonds. Instead, agency borrowers such as Freddie Mac, the EBRD and KfW have stolen most of the limelight, and Pfandbrief issuers risk being left behind.

This year has been a dismal one for Pfandbriefe and the covered bond market generally. After record new-issue volume in 1999 and 2000, there was a strong start this year, with e26.6

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