Covered bond liquidity should be on tap
The squeezing of grandfathered covered bonds last month has left issuers pondering how they can guarantee the liquidity of their product
|Boehm: welcomes VDH statement|
In the first week of July, some bonds that are exempt from withholding tax in certain European countries tightened by five or more basis points. Although tax-conscious retail and specialist investors in Switzerland have been buying grandfathered bonds in small chunks, according to Frank Will, frequent borrower strategist at RBS, retail accounts make up between 3% and 5% of the covered bond investor base, and should not be able to trigger that level of tightening. Arbitrageurs have seen a risk-free opportunity because market makers give them an easy exit. If market-making stops, investors have to choose between liquidity and performance. So do they want to see the affected bonds tapped? Tax-exempt covered bonds have been squeezed before. On July 11, the Verband Deutscher Hypothekenbanken (VDH – Association of German Mortgage Banks) reiterated its support for tapping grandfathered bonds to ensure liquidity. This went down well. "It is important that [the grandfathered bonds] are tapped to make sure that they become liquid again," says Timo Boehm, fixed-income portfolio manager at Allianz Global Investors. The VDH's recommendation was very good news for institutional investors."