Busy covered issuers to navigate tight market in 2026

The covered bond market may find itself in a difficult situation in 2026. To its left, wider than usual SSA spreads; and to its right, tight senior unsecured spreads in the FIG market. Both will pile the pressure on an asset class facing a higher level of redemptions that will need to be refinanced.

Of the market participants polled by GlobalCapital in its annual survey, 58% expect covered bond spreads to remain unchanged next year. The remainder, however, expect spreads to widen by up to 20%.

Any widening in covered bonds is likely to be the result of pressure from the SSA market. If SSA spreads move higher, thanks to elevated levels of funding required next year, many in the market expect covered bonds to follow suit.

Market participants polled by GlobalCapital, however, appear divided as to how likely this is to happen, with 29% of respondents expecting the spread between covered and SSAs to widen, while 43% expect it to tighten. The remaining 28% expect it to remain the same.

“Covered bonds look a little expensive versus SSAs,” says Mladen Djurdjevic, head of DCM syndicate at Erste Group in Vienna. “And as we see more SSA supply, SSAs will widen and put pressure on [covered] spreads.”

Gonzague Veillas, head of funding and treasury at Caffil adds: “Tighter jurisdictions could widen as they’re more impacted by the relative value versus SSAs”.

However, just because SSA spreads widen, it does not mean covered spreads have to move wider in tandem. In fact, this year, “covered bonds have managed to print inside SSAs or at least very tight versus SSAs,” says Djurdjevic.

“There could possibly be 10% more Länder supply — and the question is will this lead to wider spreads and therefore wider covered spreads,” says Florian Eichert, Crédit Agricole’s Frankfurt-based head of covered bond and SSA research.

“I’m not sure if you issue €6bn-€8bn more of Länder paper, you will have a mass repricing,” he adds. “Some names like North Rhine-Westphalia can also fund some of the extra in dollars instead.”

Of course, that said, “every time [covered and SSA] cross paths, we get push-back from investors,” says Djurdjevic. “If we have a period where there isn’t much [covered] supply and spreads grind tighter in secondary, investors will have to get their heads around [covered] being tighter.”

One major market where investors have had to grapple with covered bonds trading deep inside the sovereign curve this year is France. Thanks to persistent bouts of political volatility stemming from president Emmanuel Macron’s decision to call a snap parliamentary election in June 2024, as his government attempts to rein in a ballooning deficit, OATs have spent much of the last 18 months under pressure.

Since that election, France has been through three prime ministers, with the incumbent resigning after less than a month in office, only to be reappointed by Macron almost immediately. Understandably, this political instability — plus the persistent struggle of the French parliament to pass a budget — has pushed OAT yields up.

And although French covered bonds have tracked wider in tandem, they have done so at a slower pace, meaning for the first time in several years, paper from Europe’s most active covered bond issuing country is trading through its sovereign curve.

“As we saw this year, negative spreads versus OATs have been regularly accepted in benchmark format by investors,” says Veillas.

On January 10, Caffil punched through the OAT barrier for the first time since 2022 with the launch of a €1.25bn 3.125% July 2033 public sector covered bond at 69bp over mid-swaps, 8bp through the French sovereign curve.

Demand for the note was not dented, despite the sub-OAT reoffer spread, with books for the note closing at over €4.25bn, according to GlobalCapital’s Primary Market Monitor. A string of French deals tight to, flat or even through OATs have since followed with minimal push-back from investors.

“It seems like the market does not have a problem buying French covered bonds below OATs,” says Olaf Pimper, liquidity portfolio manager at Commerzbank in Frankfurt. “This is even more true at the long end, given the rating differential between triple-A covered and single-A OATs. You’re buying less volatility in covered compared to the sovereign.”

For instance, when the French sovereign was downgraded to single-A by S&P and Fitch in the autumn this year, covered spreads hardly budged.

“OATs are wide enough to allow covered to trade 10bp-15bp inside and still offer a decent pick-up over German names,” says Eichert.

“Whether we end up inside OATs also in shorter tenors is more a function of where OATs trade,” he adds. “If you want to argue for tight or negative spreads at five years, you need OATs to sell off as covered bonds themselves are unlikely to tighten.”

However, Veillas notes: “Relative value versus OATs is not a primary reference for French covered bonds. The sovereign curve has specific dynamics that aren’t the same as covered. It is important to understand it is not the primary reference for pricing French covered given the wide differential in rating.”

But it is not just SSA spreads that are expected to weigh on covered bond levels next year. Eye-wateringly tight valuations in the credit market could leave some issuers reconsidering the make up of their funding mix and swapping covered bonds for senior unsecured deals.

“One thing we must think about is whether issuers will do senior first or covered,” says Djurdjevic. “Given senior is tight, they might opt for senior first and then covered.”

Djurdjevic says the spread between senior and covered funding was 35bp-40bp in early December.

For example, in late November, ING placed a €1bn 2.625% December 2028 note at 38bp over mid-swaps. By December 8, this note had tightened to be bid at an I-spread of 33.5bp, just 25bp back of where the Dutch bank’s €1.25bn 2.625% January 2028 covered bond was trading.

“Even the recent Air Liquide multi-tranche was priced at a level not far off French covereds,” says Eichert.

French corporate Air Liquide, rated A2/A, placed a €500m 2.625% November 2029 deal at 38bp over mid-swaps in late October, according to PMM data. Earlier that same month, BPCE placed a €1bn 2.5% October 2029 note at 32bp. As of December 8, the pair were bid at I-spreads of 34.1bp and 25.8bp, respectively, according to Tradeweb.

However, 58% of respondents to GlobalCapital’s covered bond market poll expect the spread between covered bonds and senior unsecured to widen next year. Meanwhile, 28% anticipate it to tighten, while the remaining 14% expect it will remain the same.

Because covered bonds “will struggle to meaningfully tighten versus swaps, for the differential to widen we need credit to sell off,” says Eichert.

There were signs that this dynamic could shift late in 2025. “In November, there was equity weakness and senior spreads widened, but on the other hand, covered spreads tightened a little,” says Djurdjevic.

Survey respondents overwhelmingly expect most issuance to come in tenors between five and seven years in 2026. In fact, only one respondent expects a different sweet spot for issuance, favouring the seven to 10-year bracket.

“The mid-part of the curve is still the sweet spot, where there’s the best relative value for covereds with German regions on one side and senior preferred on the other,” says Pimper, putting the sweet spot for covered paper “around five years”.

“There’s nice steepness between two and five years, flattening out as you go along the curve,” Pimper adds. “Investors don’t see the reward of taking longer risk, which isn’t as true as the mid part [of the curve].”

New benchmarks in 2025 have been issued with an average tenor of six years, PMM data shows, down from last year’s 6.3 year average.

Of course, that does not mean issuance has been wedded to the belly of the curve throughout the year. In fact, Deutsche Kreditbank pushed out to 20 years for the first time since 2022 with the launch of a €500m 3.25% June 2045 public sector-backed deal in June.

However, long end deals were few and far between. This is in part due to the tighter valuations between SSA and covered bonds further out along the curve. “At the long end, I would rather look at SSAs,” says Pimper.

However, this could shift next year if covered spread curves were to steepen, pushing investors to go longer. “I suspect this will come from the sovereign and SSA side,” Pimper says. “If we see a huge widening there, then I guess we could at least expect some covered bonds to follow,” he adds.

“I expect spread curve steepness to be a topic next year,” says Veillas. “This year, we did something longer at 12 years and are very happy with that. But next year, if curve steepness stays as it is, I expect the same as in 2025 with not much supply at the long end, meaning anything above 12 years will be very rare.”

Alongside Deutsche Kreditbank’s 20 year deal, only one 15 year and one 12 year bond were issued in 2025, PMM data shows. Last year one 15 year deal and eight 12 year trades were issued.

“The topic of curve steepness is a natural limitation for longer offerings,” says Veillas. “Even if we’re convinced there is some demand, we will always be in a position to address it via private placements or taps of outstanding bonds.”

Conversely, the dearth of deals at the long end could help to support issuance. “If no one wants to go, then the one or two who do might achieve tight levels and benefit from a first mover advantage,” says Eichert.

Market participants expect on average, just over €160bn of benchmark issuance in euros during 2026. At the low end, €140bn of fresh paper is anticipated, rising to €180bn at the high end. However, two thirds of respondents forecast €160bn-€170bn.

Such a number would be a slight increase on the €155bn raised in 2025 and €150bn issued in 2024, data from GlobalCapital’s Primary Market Monitor shows.

A higher level of redemptions is expected to drive this greater level of fresh supply. According to Dealogic, €149bn of benchmark paper will redeem next year, compared to €128bn in 2025.

The bulk of these upcoming redemptions was issued towards the end of the Covid-19 pandemic to refinance cheap central bank liquidity taken out during the early part of the decade through schemes like the ECB’s Targeted Longer-Term Refinancing Operations.

“We have €20bn more redemptions next year and think most will be replaced but maybe not one to one,” says Djurdjevic.

At the same time, “loan growth will not really increase in pace, and that will be covered by deposit inflows to a large extent,” says Pimper. “There’s not a lot of funding pressure from loan growth.”

The two usual suspects are expected to drive the bulk of covered bond issuance in euros: France and Germany. Just over 40% of respondents expect France to lead, with just under 60% championing Germany.

“Historically, these are the two largest markets [in Europe], not just with regards to population but also to loan volume,” says Djurdjevic. “I think this will be same next year. In terms of redemptions, they have a good amount redeeming that needs replacing.”

As of December, France has a slight edge in the benchmark euro covered bond market, with €31.5bn issued in 2025, compared to Germany’s €30.5bn, PMM data shows.

Next year, €21bn of benchmark French paper will redeem in euros, compared to €27bn from Germany, according to Dealogic.

Norway sits in third place for the year with €10.25bn. However, Djurdjevic expects that to change in 2026. “I expect the third jurisdiction to be Canada,” he says. “Maybe we can expect a bit more from there compared to this year.”

“Next year the Canadian names have big redemptions, and I think they will refinance some of it,” says the Eichert.

Canada’s banks are set to redeem €23bn in euros next year, £9.35bn in sterling and $12.35bn in dollars, according to Dealogic. In 2025, however, Canadian firms redeemed €9bn, £6.38bn and $9.85bn.

“There will be a bit more of a link between redemption volumes and higher supply, although maybe not one to one,” says Eichert. “Some of these covered bonds will be refinanced with unsecured supply, but I don’t think we will have anyone with €7bn of redemptions sitting there doing nothing.”

Canadian banks have placed €9.5bn in euros this year, ranking them sixth, down from €13.25bn in 2024 and €17.75bn in 2023, PMM shows. Instead, their focus has been on the senior unsecured market where they raised €13.6bn.

Eichert also expects Australia to be busy next year. “That is one of the few jurisdictions where the overall funding need is going up,” he adds.

In total, Australian banks placed €9.85bn in euros this year, up from €4.85bn in 2024, according to PMM data.