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Das Rheingold

15 January 2018

Regular readers will know that I’m a fan of the pfandbrief market. But as it is Christmas week please indulge me four posts on another of my great German loves. It is slightly relevant to the covered bond market. Promise.

The first four minutes of Wagner’s ring cycle are an incredible tonal drone starting from a low E flat. There are no melodies and no dissonance. It is a musical depiction of the Rhein itself before the tumultuous events of the next four operas.

It is far more than a depiction of a river in music. That it is also an image of the human psyche is an interpretation so commonplace that it has become trite. But I wonder if it is also a model for a particularly Germanic way of thinking about recent market events? The idea of a (to use an inappropriately Judaeo-Christian phrase) pre-lapsarian ideal to which we will one day return seems to be particularly prevalent in German discussions of the last ten years. The very concept of a return to pre-crisis levels of both spreads and volatility implies that what existed before was somehow normal (dare I say, divinely ordained?) and that what we are in now is equally abnormal and doomed to end eventually. 

Germans tend to place more emphasis on this idea than people from traditionally higher spread markets, such as in southern Europe or more volatile markets, such as the UK.

The drone, and the harmonious song of the Rheinmaidens is eventually shattered by Alberich’s dissonant leitmotif, the character Alberich is motivated entirely by greed for the rheingold. The idea that greed caused the crisis and the disharmonic conditions isn’t perhaps stretching the analogy too far.

As a, perhaps fanciful, aside, it always struck me as odd how many of the more cliched market analogies are at root musical – too often syndicate briefings and researcher’s market wraps talk about dissonant spread conditions or pre-crisis harmony.

To borrow the most prevalent of these musical analogies, the tone of the covered bond market is set by the tone of the pfandbrief market. As I have commented in a Christmas post before It differs from that of, say the bank capital or securitisation markets and is perhaps only really comparable to the syndicated loan market. Both markets involve rivals co-operating on most deals, both markets are relatively immune from market volatility. This relative immunity from volatility is not a function of the lower beta of pfandbrief. If it were the bund market would be less excitable still.

I must stress the ‘relative’ in that volatility. Relative to the past, certainly. Pfandbrief spreads became more volatile – and the market less co-operative? - after the introduction of jumbo pfandbrief in 1995 and then again after the market crisis of 2007. But still nothing comparable to the securitisation market. An emergence from a state of calm into the greed driven and discordant current market?

Spoiler alert: after sixteen hours of the most sublime music ever written the gold returns to the Rhein. Harmony is restored. It may be a valid analogy. But it is not a prediction. 

 By Richard Kemmish




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