Covered bonds: Picking up tacks in front of the steamroller
The post-summer jump in covered bond new issuance has sharply reduced spreads, surprising many analysts. ECB purchases helped recovery but liquidity is bound to tighten and yields correct. Philip Moore reports.
"THE SAFEST ASSET on the capital market." That, embarrassingly, is how the German government’s website described the Pfandbrief in August. Visit the website today and the reference appears to have been deleted. It’s just as well. As the Commerzbank analysts who spotted the gaffe pointed out in research published soon afterwards, if the Pfandbrief is the safest asset class on the capital market, where does that leave German government bonds? Judging by the recent performance of some covered bond spreads, however, the market seems to have come close to taking the Bundestag’s website entry at its word. In research published at the end of September, Barclays Capital commented that spread narrowing in covered bonds not only underlined the "historical richness" of the sector; it had also created an opportunity for investors to switch out of a number of 10-year Pfandbriefe into zero-risk-weighted debt issued by agencies such as KfW, L-Bank, Rentenbank or NRW Bank and earn a pick-up of between two and 12 basis points for their pains.