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Pfandbriefe: VDP attempts normalcy in abnormal market

The reintroduction of mandatory market-making in Pfandbriefe has not gone smoothly.

In early August, the VDP had said that it expected members to start quoting prices for all jumbo issues of two years or more at triple bid-offer spreads, regardless of what those spreads were. Dexia Kommunalbank had planned to launch a five-year, public sector Pfandbrief on September 1 but held back in case the resumption of market-making had a negative impact on the market. It did. Spreads across the yield curve widened by four to five basis points, and Dexia pulled its deal. Although it is far from the first time that a planned covered bond has been pulled since the credit crunch, a public-sector Pfandbrief from a big name such as Dexia is supposed to be the best of the best.

"This trade was clearly affected by the widening of German names because of the market-making [resumption]," says one analyst. "It’s certainly not to do with the credit. There’s nothing wrong with a five-year, public-sector Pfandbrief at eight over mid-swaps."

Anyway, many would argue that spreads on Pfandbriefe needed to widen slightly to come more in line with other covered bond markets. It would seem that the VDP was simply trying to get the market back on track.

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