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Capital Markets

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."

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