5 questions for Thomas Kruse, Executive Director and Head of Investments at Amundi GmbH

Covered bonds or Pfandbriefe are an essential asset class, particularly for German clients. The reason for this is that Pfandbriefe consistently have very good ratings and are issued with an interest rate premium over government bonds (exception: covered bonds in crisis countries such as Italy, Spain, Greece). In periods of turbulence or crisis in the markets, Pfandbriefe were at all times a stable asset class with, mostly, adequate liquidity as far as trading is concerned. Moreover, the fact that the ECB’s asset purchase programs always included Pfandbriefe to a great extent had a positive impact on Pfandbriefe as an asset class. And let me add at this point that Pfandbriefe were the first asset class that the ECB bought.

Basically speaking, harmonization is to be welcomed. It should not, however, lead to the covered bond product being watered down (for example in terms of “premium covered bonds” and “ordinary covered bonds”). By and large, the present draft merely sets forth the status quo without producing any real improvement, far less an actual harmonization, which is precluded, amongst other things, by the various insolvency regimes of the individual countries. These mean that investors will have to continue to analyze not only the issuers and the data on the cover pools but also the legal frameworks. However, the amendment makes it easier for new issuer countries to draw up their own local Pfandbrief laws, since at least the minimum standards have now been laid out.

On March 13, the British Parliament rejected the EU withdrawal agreement negotiated by Prime Minister Theresa May as well as the option to leave the EU without a deal. The final vote on Friday, March 15, approved an application to extend the Brexit deadline to beyond March 29. An extension until mid-May seems conceivable to avoid a clash with the European elections. We are therefore expecting a short extension in the assumption that the existing deal could be modified slightly.

Amundi announced in October 2018 that it would expand its commitment to responsible investment considerably. To this end, Amundi has drawn up a comprehensive and ambitious three-year plan. With regard to your question, it should be emphasized that the so-called extra-financial analysis on the basis of ESG criteria is to be extended to all active and passive fund management wherever technically possible over the next three years.

Pfandbriefe offer the German investor an attractive alternative to German government bonds. Whereas German government bonds have a negative return with maturities of up to nine years, at present investors already obtain a positive return on Pfandbriefe running three years and more. Pfandbriefe currently yield around 0.5% more than same-maturity German government bonds. Due to the strength of the German Pfandbrief Act, there have been no defaults in the past, and nor are they to be expected in the future. That is why Pfandbriefe are eligible for trusts. The rising property prices in Germany currently benefit the mortgage loans that serve as cover for Pfandbriefe. In this context, we can identify overheating at only a very small number of locations.