Navigating the covered bond market will not be without its challenges in 2020. The Targeted Longer Term Refinancing Operation (TLTRO), European Central Bank deposit tiering and the Covered Bond Purchase Programme have collectively distorted the market, but added to this concoction is the impact of negative interest rates. Against this backdrop issuers, investors and investment bankers gathered in Munich in November to discuss the outlook for covered bonds. It is likely that new issue premiums will gradually tighten, but the path is unlikely to be smooth. January is typically the busiest month, but in 2019, issuers that funded this early paid the highest spreads. And, with the ECB expected to buy in the region of €4.5bn covered bonds a month, issuers will not feel compelled to move early. But the ECB monetary policy has unwelcome implications. Covered bonds have begun to lose value against government bonds, and this will extend if the ECB is unable to loosen restrictions on government bond purchases.

Analysts at Commerzbank have criticised Markit for excluding Deutsche Bank’s innovative conditional passthrough covered bond from the iBoxx index for covered bonds. They believe the decision is “technically difficult to justify” and could discourage other banks from embracing new formats.

The European Banking Federation has proposed a raft of policies to promote sustainable finance, such as a public sector financing guarantee scheme, looser bank capital requirements, a tweaked securitization framework and different collateral rules. Perhaps not surprisingly, the measures would lighten the regulatory burden on Europe’s banks, and they were criticised by politicians.