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- Covered bonds start the year strong
Mortgage-backed bonds (covered bonds) have got off to a flying start in the new year. Covered bonds (in German: Pfandbriefe) with a volume of EUR 40.6 billion were issued on the primary market in January.[1] This means that issuance was slightly higher than the already very impressive January 2023 figure of EUR 39.7 billion. Only in January 2011 were more covered bonds placed in the market. This asset class is often seen as an alternative to government bonds due to the high level of “creditor protection,” given the investors’ claim on the cash flows of the underlying assets, even if the issuer becomes insolvent. This is governed by dedicated national covered-bond jurisdictions.[2]And they are an alternative with a yield pick-up. Investor interest has continued into February, and we expect it to remain high as the year advances.
German covered bonds offer a yield pick-up versus German government bonds
Sources: Bloomberg Finance LP, DWS Investment GmbH as of 2/6/24For much of last year, shorter-dated covered bonds, in particular, were issued (and in demand) due to the high level of uncertainty about future yield trends. This has changed significantly in January 2024. In recent weeks, issuance has been concentrated mainly at the longer end of the curve, and there does appear to be some catch-up potential. More than 30% of the bonds issued fell into the seven-to-eight-year maturity range. There was also more issuance in the ten-year and longer range. The proportion issued for these maturities has risen to around 28% this year from just 12% in January 2023.
In our view, the current market environment could hardly be better, especially for issuers. This is evident in the fact that initial price indications have recently tightened significantly during the sales process without lowering demand. It remains to be seen whether the covered-bond segment will be able to maintain its current high momentum over the rest of the year. But the first few weeks in our view should have stoked optimism among many investors.
