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Investor viewpoints

05 August 2014
Richard Kemmish

I’m normally quite sceptical about investor surveys (“Question 1: would you like a) more yield or b) less yield? Question 2: would you like a) more risk or b) less risk?”). But the recent survey of 170 German investors by NordLB threw out too many unexpected answers to ignore.
For example, the survey showed that investors are far more likely to go down the rating scale than they were as recently as 12 months ago. On the other hand, they are asking for more ratings on any given bond – the vast majority want at least two agencies to look at it. This could be seen as a contradiction - we want more ratings but they are less important.

Or it could be seen as evidence that the shift from covered bonds being a rates product to being a credit product has finally happened. The credit/rates debate is as old as anyone in the market can remember, and the definition of the two markets is as arbitrary as it gets (I’ve got my definition, but I bet its different from yours).
But if the researchers, investment bankers and journalists are the advocates of different opinions, the German investor base is the jury (on accounts of them being the ones with the cash). If German investors want to go down the curve and start reading the investor reports then the low yield environment has succeeded where the credit crisis failed in finally converting us into a credit product.

Another counterintuitive outcome of the survey is that there is an overwhelming view that spreads will go tighter for pfandbrief, an incredible 55% think at least 10bp tighter to just 11% thinking wider. Outside Germany most investors think exactly the opposite. This might be explained by the tendency of German investors to think of spreads to bunds, whilst non Germans more frequently think of spreads to swaps, and have an intuitive feeling that anything through swaps can’t be quite right. It is perfectly possible (probable?) that both are right, pfandbrief will go tighter against bunds but not against swaps.

Other covered bonds are also expected to go tighter, with almost as much confidence (and much less contradiction with the views of non-German investors).

But if spreads are going to tighten across the board, why do the vast majority of German investors still have a preference for lower beta products? Only 14% of investors prefer the Spanish or Italian covered bonds that have most to gain from a generic tightening. 

Even the relative ranking of the agencies is the exact opposite of the views of non-German investors (S&P first, then Moodys, then Fitch).

I’ve commented before on the balkanisation of the covered bond market since the crisis. This survey supports that view. What would be really interesting is if the exact same set of questions was put to non-German investors.

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