Covered Bond & RMBS Comment – Downward revision to outlook for issuance

by: Joost Beaumont

  • Issuers remain at the sidelines
  • We revised down our estimates for issuance this year…
  • …resulting in a shrinking market
  • Net negative supply and CBPP3 to weigh on spreads
  • Buyers of longer dated German Pfandbriefe, which provide positive return

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Covered-Bond-RMBS-Comment-28-July-1.pdf (212 KB)


Yesterday, activity in the primary market remained absent for the fifth working day in a row, and it seems that issuers are in wait-and-see mode. Some banks still need to report their figures, others might have gone on holiday, while some economic events also are at play. Indeed, the FOMC statement yesterday was a providing a more positive assessment of the US economy, but did not provide any clear signal on the timing of the next rate hike, according to our economists. The FOMC continued to say that the timing and size of future hikes would depend on ‘realized and expected economic conditions relative to its objectives’. We think the Fed will remain on hold until early 2017.

Less euro benchmark issuance in H2

We have published our H2 outlook for the euro benchmark covered bond market. In terms of new issuance, we have revised down our forecast of total issuance by EUR 10bn to EUR 141bn. This would imply that some EUR 50bn of euro benchmarks will be issued in the second half of the year, clearly marking a slowdown in the pace of issuance compared to the first half of the year. What is more, it would imply that net supply will be EUR 5bn negative this year, shrinking for the third time in four years.

Spreads to remain under pressure

Furthermore, we expect that negative net supply as well as CBPP3 will continue to put downward pressure on spreads. UK covered bonds are looking attractive in our view, following the widening in the run-up to the referendum and given that the impact of the UK vote to leave the EU on the quality of UK covered bonds should remain limited. Meanwhile, we remain overweight non-CBPP3 paper. Finally, we do not expect any major changes to CBPP3.

French and German paper in demand

Yesterday, the summer lull continued in the secondary market. There were some buyers of French covered bonds in the belly of the curve, while we saw buyers of German names in the long-end, probably as these bonds are still trading at a positive yield. At the moment. 85% of German Pfandbriefe trade at a negative yield. Indeed, only Pfandbrief with a 8y or longer duration provide a positive return.

Other news:

* Fitch affirmed the AAA rating of the covered bonds issued by ANZ Bank New Zealand. It also increased the D-cap from two to three. The rating buffer is two notches.


We would like to inform you that we will take a holiday break. We will be back around the middle of August.