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That time of year again

27 July 2016
Richard Kemmish

The annual release of the ECBC’s statistics on the changing composition of the covered bond market is a much anticipated event. Well it is for me, mine is a quiet life.

I was sadly disappointed to see that my prediction from last year, that Denmark would eclipse Germany at the top of the league table, failed by a paltry €400mn.

Perhaps next year? Perhaps not. The decade long decline in the Pfandbrief market may have reached its natural conclusion, already mortgage pfandbrief are increasing – no doubt fuelled by that giddy 6% year-on-year increase in property prices there.  The counterpart – the continued shrinkage of public sector pfandbrief has surely reached its conclusion as the decade long grandfathering rules for a large swathe of public sector bonds to remain eligible for covered bond pools expired last year. As a nostalgic aside I remember hearing in 2004 that the eligibility of these bonds would expire in 2015 and thinking how ridiculously distant that felt.

But the relative size of the two titans of the market is largely irrelevant. German thought leadership in the covered bond market is ensured even if they lose their numerical leadership. Sorry Denmark, bonds outstanding are a less relevant measure than bonds purchased (where the German investor base remains dominant and the Danish participation in non-Danish issues remains, to be polite, modest) and structure, mush as we all love the Danish model (I mean that very genuinely) and its unique approach it is not the model that has been copied elsewhere.

The diminution of the German supremacy of the covered bond market comes not from Denmark but from everywhere else. German covered bonds outstanding represent just over 15% of the total, the lowest ever and a very long way below the 70% plus value that it was when I first discovered this market fifteen years ago.

Looking at issuance statistics it is even more striking – Germany was only just 10% of the total of last year’s new bonds. I suspect that if you were to narrow this down to public benchmark deals it would be even less than 10% – given the greater German preference for private placements and namens-pfandbrief. Again, for those of us who were in the market in the early 2000s when a non-German issue was something of a novelty in comparison with the regular €3bn+ pfandbrief deals this is quite a shocking statistic.

Admittedly this will be slightly ameliorated by the greater duration of German covered bonds this year – as more of the curve goes below the zero yield point more German issuers have tended to lengthen their traditionally shorter maturity profiles for bechmarks. 
Even so it looks like German bonds as a percentage of the total market is set to fall further even if the total notional outstanding levels off this year.

What of the other countries and trends in the annual statistics?  Sadly I’ve hit my 500 word limit so that will have to wait for the next post.   

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