5 questions for Dr. Jürgen Michels, BayernLB

Yes, the issue will remain in the focus of market participants. Although inflation rates will fall from their very high levels in the course of 2022, this development will be sluggish, especially in the USA. Wage developments, which are important for the underlying inflation dynamic, will receive increasing attention. However, as inflation declines, inflation expectations should tend to calm down somewhat and no longer have as much of an impact on interest rates as in 2021.

Even before the fourth wave and the additional uncertainty from the Omicron variant, the hawks probably shouldn’t have prevailed. However, as risks to the economy increase, a significant tightening of ECB policy becomes even less likely. We expect an end only to the ultra-loose PEPP and TLTRO pandemic programs in the next year. However, the APP, which probably will be extended during a transition phase, is likely to continue and interest rate hikes remain a distant prospect. At the end of 2022, however, banks could be relieved by the increase in the tiering multiplier.

The Pfandbrief is and remains the benchmark in covered bonds, even if the supply for investors has suffered somewhat in the last two years. The early national implementation of the European Covered Bond Directive in particular has shown that the Pfandbrief system is second to none worldwide. However, as a result of the subsidized financing options offered by the ECB, funding via Pfandbriefe declined. The volume of new issues of Pfandbriefe even lagged behind French covered bonds for the second time after 2020.

In terms of valuation, it was not possible to generate a positive total return with Pfandbriefe in 2021 due to the rising interest rate level, but comparable SSA or government bonds were outperformed. Pfandbriefe also outperformed other covered bonds. So investors continue to appreciate the save-haven nature of Pfandbriefe combined with the still attractive pickup to BUNDS.

The debt-mutualisation tendencies in the euro area, which got a strong push with the EU Recovery Fund, are likely to continue. The French EU Council Presidency is likely to drive this forward, with the acquiescence of the new German government. Against this backdrop and the higher carry, we remain strategically overweight in the euro non-core segment (periphery). However, volatility is also to be elevated in 2022. First, because of the expiration of the PEPP. Second, the elections in Italy, which are not due until 2023, could cast their shadow ahead and put political risks back on the radar screen.

In corporate bonds, we prefer HY over IG and are thus also positioned for opportunities. The lower interest rate sensitivity of HY due to its lower duration, the higher carry and our expectation of a continued economic recovery in 2022 speak in favor of HY. Here, too, periods of increased volatility must be expected, especially as large parts of the HY segment are already trading below pre-pandemic levels in terms of spreads.

During the pandemic, the importance of monetary and fiscal policy for the economic cycle has increased significantly. Therefore, investors should keep an eye on policy, especially how central banks’ monetary tightening plans are evolving. In addition, the topics of sustainability and green finance will be a priority for the markets next year. The ambitious climate targets of governments, greater attention from investors and, not least, new regulatory requirements will motivate the green finance markets to new heights. For example, the German government will generate a liquid “green yield curve” with further green federal bonds of various maturities, and the EU plans to issue 30 % of NextGenerationEU and thus up to EUR 250 billion as green bonds.