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Sebastian Sachs, B. Metzler seel. Sohn & Co.
"The monetary guardians are (...) likely to announce an adjustment of their stance in March"

Interview

5 questions for Sebastian Sachs, B. Metzler seel. Sohn & Co.

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

The ECB's change in sentiment - what brought it about?

Sebastian Sachs

Sebastian Sachs

B. Metzler seel. Sohn @ Co.

Ultimately, it was probably the January inflation figures from the Eurozone that tipped the scales. ECB insistence that the higher rates of price increases in the single currency area were merely a temporary phenomenon no longer seemed credible. Tensions have also grown within the ECB Council. Germany and smaller countries with lower debt ratios and high inflation rates are demanding that the very expansionary stance be reconsidered and adjusted.

Now the pressure seems to have become too much and the monetary guardians are most likely to announce an adjustment of their stance in March. Of course, it is clear that the short-term inflation phenomena cannot be combated by monetary policy, especially not exploding energy prices. Nevertheless, the central bank would be sending an important signal. Because when it publishes its new inflation and growth forecasts in March, it should become clear that the ECB experts also expect higher inflation.

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

What announcements / changes do you expect?

Sebastian Sachs

Sebastian Sachs

B. Metzler seel. Sohn @ Co.

We assume that President Christine Lagarde will first announce in March that the Asset Purchase Programme (APP) will expire at the end of September. This leaves the door open for an interest rate hike. The ECB has always emphasised that it will not raise interest rates before the end of the APP. However, since the central bank also points out that it will continue to act according to the available data, a precise date for a first rate hike is likely to remain open in March for the time being.

Our forecast of a rate hike in December of this year should therefore only be announced later on this year. Furthermore, we also see the possibility that the ECB could abandon its declared sequencing in the tightening process if the scaling back of asset purchases triggers too much turbulence – especially for government bonds of the Eurozone periphery. Then, in our opinion, the interest rate hike could be advanced. This departure from tge sequencing is not our baseline scenario, but it is certainly conceivable.

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

How are covered bonds reacting to the changed market outlook?

Sebastian Sachs

Sebastian Sachs

B. Metzler seel. Sohn @ Co.

In an initial reaction, Pfandbriefe and covered bonds in general did not really let themselves be infected by the hectic activity of the other market segments. The segment rather benefited from a flight to safe havens. The focus was on short maturities. But we know from history that covered bonds often react with a delay to certain developments. ING’s issue in mid-February was ultimately the real litmus test for the market’s receptiveness and sentiment. While the five-year maturity could still be described as a real success, the issuer already had to pay a premium of an estimated seven basis points for the fifteen-year tranche.

In the secondary market, the issue triggered spread widening, especially for long maturities; however, this varied quite a bit from jurisdiction to jurisdiction. Now the picture is slowly becoming clearer and we can state that covered bonds are once again presenting themselves as a comparatively solid rock. This has only recently been shown in particular by this week’s issues by BPCE from France and the debut of DZ Hyp with the Green Pfandbrief.

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

Does this mean that the ECB's support for covered bonds will be completely lost?

Sebastian Sachs

Sebastian Sachs

B. Metzler seel. Sohn @ Co.

Our forecast is that the APP will expire at the end of September and thus the purchases under CBPP3 will also be discontinued. This means: the net support by the Frankfurt monetary guardians will cease. Nevertheless, we must also bear in mind that a total of 41 billion euros in maturities will have to be reinvested by the ECB this year. Against this background in particular, we can still assume substantial support for covered bonds – at least for 2022. This assumption is of course also supported by the fact that the purchases will nevertheless continue until the end of the third quarter, albeit with decreasing volumes.

Sebastian Sachs

Sebastian Sachs

B. Metzler seel. Sohn @ Co.

As in all market segments, covered bonds are currently undergoing a realignment, which we believe is not yet complete. The changed market conditions should be reflected above all in rising swap spreads, but also in higher yields – especially in the long and ultra-long maturities. The driver here is likely to be primary market activity in particular, which we expect to be rather subdued on the one hand, and which on the other hand – and this is the important point – will demand significantly higher new issue premiums from issuers, especially for longer maturities.

However, the recalibration of the monetary policy stance is only one influencing factor. The increased geopolitical risks will be weighing on the primary covered bond market, too. However, we also assume that once the necessary level adjustments have been completed and the current nervousness has subsided, covered bonds will quickly regain their attractiveness due to the higher swap spreads and, of course, the expected increase in yields – which should then be even higher. Covered bonds cannot escape the general market environment, but this will by no means cause them to fall down the popularity scale in the long term.

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