Covered Bonds

Despite mounting evidence of a second more fatal wave of Covid-19 infections and longer lasting, tighter lockdowns, it seems that very little can unhinge the positive outlook for covered bonds as liquidity is set to remain king.

Aareal Bank mandated leads on Monday for the first new covered bond of 2021. At the same time, market participants have low issuance expectations for the next few days. Even though supply may improve next week, January volumes are expected to be lower than in previous years.

Covered bond issuance from Europe’s peripheral regions is likely to be anaemic in 2021, as issuers will continue to rely heavily on far cheaper central bank funding. Covered bond spreads are very tight, but the cost of senior unsecured bonds has come down faster, and deposits have grown.

The European Central Bank’s gross covered bond purchases sustained strong momentum in November which, in conjunction with wavering supply and high redemptions, caused real investors to be squeezed out — a theme that is bound to continue in 2021.

The three major rating agencies have broadly positive outlooks on the covered bond market next year, but they have underlying concerns about rising unemployment, mortgage payment holidays, sovereign and issuer rating downgrades and Brexit.

Expected euro denominated covered bond supply from the Nordic region looks promising with Norway likely to prove a particularly bright spot. However, more cost-effective domestic funding in the Swedish market is expected to depress euro volumes there.

Germany will remain one of biggest covered bond issuance regions, accounting for up to a fifth of European supply next year. The residential real estate market and economy are expected to remain resilient and, along with robust investor protection built into Pfandbriefe, the market is well buttressed — even when it comes to riskier commercial real estate exposures.

Singapore could prove to be a rich seam of covered bond issuance next year, with bankers suggesting analysts’ expectations are far too pessimistic. Conversely, Australian issuance may prove to be disappointing. Meanwhile, potential new legal developments in Japan and Malaysia will provide a key focus of attention.

Covered bond supply from the Netherlands is expected to lead the Benelux region next year, where a total combined issuance of €9bn is due to surfac,e based on the average of six forecasts.

Covered bond issuance from France is likely to be the highest from any country next year, reflecting the sheer size of the market, high redemptions and banks' propensity to use covered bonds for market funding rather than for repo funding at the central bank.

Investor demand for higher yielding covered bonds from Central and Eastern Europe will likely outpace relatively moderate supply by a considerable amount. And with a wide range of debut issuers in a considerable number of new jurisdictions expected to surface, the outlook is very promising.

Canadian issuers are expected to concentrate on building their regulatory buffers in 2021 mainly with dollar senior issuance with bankers suggesting that analysts’ covered bond supply forecasts for next year, which are considerably above €10bn, are overly optimistic.