Covered bond investors will be embarking on a new journey in 2022. But what do they have to bear in mind when packing their bags? Sabrina Miehs, a senior covered bond analyst in Helaba's research and advisory team, provides her views on what investors should look out for.
1: Stable credit outlook
The credit outlook for covered bonds is set to remain stable, with Covid-19 having barely any impact in the form of non-performing loans or on the quality of covered assets. On top of that, the banking sector has proven itself to be resilient. Levels of overcollateralisation and rating buffers are high. Consequently, there is no question about the traditionally crisis-resistant quality of these instruments, even if there are any subsequent
2: Application of EU Covered Bond Directive will have supportive effect
In 2022, the application of the EU Covered Bond Directive will have a supportive effect on covered bonds in what is expected to be all EU member states. Thereafter, depending on existing national requirements, in some cases more stringent quality standards will apply to covered bonds and their supervision. There may even be rating uplifts in countries such as Portugal and Spain.
In 2022, the application of the EU Covered Bond Directive will have a supportive effect on covered bonds in what is expected to be all EU member states
3: Diminishing impact of ECB measures
Monetary policy will dominate activity on the covered bond market in 2022. In terms of supply, the high levels of TLTRO III uptake by banks will continue to rein in public placements, albeit most likely to a lesser extent than before. This is because the TLTRO III rate of -1 % expires in June 2022. Therefore, depending on the market environment, it is conceivable that institutions will replace maturing instruments with capital market refinancing measures.
As far as demand is concerned, the ECB will remain active in the scope of its asset purchase programme (CBPP3), although its attention will increasingly turn to the surge of bonds from the public sector and interest in covered instruments will fade. As interest rates are slightly increased, investors will return to the market.
4: Sustainability is coming along for the ride
We anticipate that 2022 will once again see a steep rise in green and social covered bonds, as this segment is gaining ground. On the upstream lending side, despite the EU taxonomy presenting major challenges for issuers for a long time to come, there should also be growth in new business with sustainable loans. What is more, an increasing number of investors are on their way to helping create a more sustainable planet.
5: Another year of net negative supply of new issues
Overall, our forecasts suggest the primary market volume of euro benchmark covered bonds will be in the range of €110bn-€120bn in 2022. That would once again be below scheduled maturities of €136bn. Issues from France and Germany will dominate the market, followed by Canada and Norway. Given a net negative volume of new issues, a certain level of demand from the ECB, rising yields and investors returning to the market, we do not expect risk premiums to rise noticeably.