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Happy New Year?

11 November 2015
Richard Kemmish

At this time of year us middle aged curmudgeons traditionally start complaining about the ever earlier onset of Christmas. The signs are already there: saccharine-rich adverts for major department stores, annoying coworkers asking for final meal choices and of course, covered bond researchers publishing their forecasts for next year’s issuance volume.

Congratulations then to our friends at Credit Agricole for being the first out of the blocks with an impressively upbeat forecast of €180bn – about 20% more than this year and, significantly, more than redemptions for the first time in a while.  

Of course forecasts are traditionally unreliable and usually overstate actual supply (and if you think the researcher’s public forecasts are on the high side you should see the forecasts used for DCM budget purposes – at least until the bonus pool is fixed). But I can’t help but agree with Florian and his team’s optimism this time.

All of the traditional factors are supportive: mortgage markets are growing in most jurisdictions – not so much southern Europe admittedly – redemptions are high and bank funding is returning to a more normal footing.

More significantly and more technically, 31st December 2015 was a date set 12 years ago as the last day of eligibility for public sector loans in Germany that benefit from mutual guarantees. The long decline of the public sector pfandbrief market may finally be over. It is difficult to overstate the importance of this decline on the balance of supply and demand in our market for the last 10 years, and in turn on the development of new markets at attractive spread levels.

How much bank funding will be in the form of covered bonds next year?

Probably more than last year: senior unsecured debt is looking less attractive from a relative value perspective. At the same time those banks whose unsecured debt is loss absorbing (for TLAC or MREL purposes) are presumably closer to where they need to be on these ratios than they were this time last year.

The securitisation market continues to underwhelm from the point of view of high volumes of cost effective funding for banks. The ECB’s purchase programme has seemingly failed in that regard.
But of course the biggest variable of all is in Frankfurt. How much QE will there be next year? No idea but plenty of commentators are saying that it is likely to go past its initial September 2016 end date. More importantly how much of the QE will be in the form of covered bonds? Again no idea but surely there has to be an argument to shift the focus away from covered bonds and towards the ABS and Public sector programmes.

If the purchases were to stop abruptly, how much impact would that have on spreads? Potentially a lot, at least initially if the ECB has really squeezed out much of the private sector capacity. Perhaps the purchase programme is the biggest single downside risk to next year’s projected volumes?

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