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The euro covered bond market is bound to grow

28 November 2016
Richard Kemmish

As I mentioned in my previous piece, it is time to start making predictions about next year’s covered bond issuance.

For what it’s worth, it is clear that the covered bond market next year will be larger than it is now for several reasons:  

If you look at the drivers of growth or shrinkage in our market there are, fairly obviously three categories and three trends: new countries grow, established countries tend to stay fairly constant and Germany declines. Taking the long view, that middle category has grown in importance recently causing the overall volume stagnation. Pre-roughly-2008 most countries were new and growing and the equation was: Germany shrinking more than offset by everyone else growing.

This year the decade long decline in the pfandbrief market will most likely come to an end. The driver of this decline in volumes has been public sector bonds which seem to have reached their commercial nadir.  Mortgage pfandbriefe are dully predictable in terms of market size (and many other ways too. I intend that as a compliment). Maybe they will grow slightly, but it is highly unlikely that the number of mortgage pfandbrief outstanding twelve months from now will be very different from what it is today.

Take away the shrinking part of the market and you are left with new supply. Whilst Australia and (to a lesser extent) Canada may rapidly be approaching ‘established country’ territory, other new countries will continue to growth. This year was an exciting one for us fans of CEE covered bonds, expect more from Turkey, Poland and (hopefully) some of the other new jurisdictions next year.  
But what of the existing issuers in the existing countries? There are less redemptions next year than this – about €25bn less in the euro market. Whilst this is always an important factor for investment bank researchers trying to predict next year’s issue volumes, it is effectively irrelevant for predictions of overall market size. The maturing bonds will get refinanced. 

Perhaps the biggest driver of new issuance though will be the ECB’s purchase programme. The prospect of a sudden end to this vast spread subsidy will encourage as much pre-funding as possible. Given comments about it approaching its limit (or limits as Governor Nowotny said, a subtle but important difference) it seems more than likely that the pre-funding rush will happen in 2017.

Technical issues aside, the underlying assets that need funding via covered bonds are growing and will continue to do so. Interest rates will continue to stay low and despite concerns about house prices being out of control measures to control them (risk weight floors, leverage ratios, etc) are unlikely to be introduced (it is certainly an election year in three of the largest countries in Europe, possibly in three others) and if they are it will be some time before they impact new mortgage origination volumes.

All of which suggest that it should be a good year for covered bond growth. You read it here first.

(For the record, my comment in the previous piece about covered bond researchers having a dull life only refers to their professional life. ) 

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