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Jumbo liquidity hit by a big freeze

The jumbo covered bond market was 10 years old this year. Its key characteristic has always been liquidity. But one analyst thinks this is no longer the case. Is the jumbo market in for a shock? Mark Brown finds out more.

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THE JUMBO COVERED bond market lives up to its name. At the end of June, the volume of jumbos outstanding was more than €600 billion. That’s roughly 40% of the covered bond market. And it is getting bigger. In the first half of this year, jumbo issuance set a new record, exceeding €78 billion, partly because new covered bond issuers gravitate towards jumbos.

The whole point of jumbos is, of course, that they are large. The first jumbo Pfandbrief deals in 1995 had a minimum size equivalent to €255 million. Today, jumbo Pfandbriefe must be at least €1 billion within 180 days of issuance, and the amount remaining in the market must not drop below that level.

But size is just a means to an end. The end is liquidity, and this also requires market making. So for a Pfandbrief to be a jumbo, a minimum of three joint lead managers have to commit themselves to quote two-way prices in lots of up to €15 million during trading hours. Bid-offer spreads range from five to 20 cents, depending on maturity.

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