Surging covered bond repo supply hits OC, lowering protection

Safety 230x150
By Bill Thornhill
21 May 2020

The gush of central bank repo-eligible supply in the covered bond market has reduced collateral protection by more than 50 percentage points, in some cases. And with a precipitous drop in the pace of mortgage production likely to follow, investors will be obliged to discriminate between issuers that commit to maintaining minimum levels of overcollateralisation (OC) and those that don’t.

A record amount of €79bn of ECB repo-eligible retained covered bonds was issued in the quarter to April 2020, including several deals of €6bn said Barclays analysts.

For some banks, such as the Dutch and Canadian national champions, the swell in repo-eligible issuance is not such a ...

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