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Market Pulse

Pfandbriefe offer significantly more attractive spreads in 2024

Philipp Jäger

Philipp Jäger


The primary market for EUR-denominated benchmark covered bonds has remained comparatively active this year. In particular, the ongoing repayment of TLTRO funds and the stagnating growth in customer deposits have clearly prompted institutions to look for alternative sources of funding – and covered bonds are predestined as a cost-effective and relatively stable source of market funding.

Up to and including the first week of July, a total of 138 new bonds with a total volume of around EUR 110bn were placed publicly. German Pfandbriefe once again made a notable contribution. At 18.6% (just under EUR 21bn in absolute terms), their market share was roughly on a level with the previous year or the average of the last ten years. Meanwhile, the universe of German benchmark Pfandbriefe has broadened again in recent months: this time through issuers that were previously already represented on the Pfandbrief market but did not yet in benchmark format of ≥ EUR 500 million. Landesbank Saar, Oldenburgische Landesbank and Sparkasse Hannover are new to the liquid German Pfandbrief universe this year with large-volume EUR issues.
Meanwhile, investors were once again remarkably receptive in the first six months of 2024, which was reflected not least in comparatively low new issue premiums, high bid-to-cover ratios and the fact that investors were also keen to buy longer-dated maturities. The relative attractiveness of spreads in the covered bond segment – particularly in comparison to other bank bonds, but also to other asset classes such as government bonds – is likely to have played an important role in this. One eye-catcher in this context is that the absolute primary market spreads in general, but also in Germany in particular, have been significantly more attractive year to date than in the previous year. To date, the average issue spread for EUR benchmark Mortgage Pfandbriefe has been 35 basis points above mid-swap, while the average issue spread for Public Pfandbriefe has been just under 29 basis points above mid-swap and therefore well above the respective 2023 levels.

Mortgage Pfandbrief average annual new issue spreads

Public Pfandbrief average annual new issue spreads

With regard to the further spread development of German Pfandbriefe, we expect a sideways movement in the second half of the year, as there is unlikely to be any major market impetus. On the one hand, new issue activity is expected to be more subdued in the coming months. We currently anticipate a further EUR 7bn in Pfandbrief benchmark issues from German issuers. On the other hand, we assume that fundamental aspects such as cover pool quality and issuer creditworthiness should not drive any change in sentiment in the second half of the year. The issue of commercial property risks, which still had a significant influence on the risk perception of some issuers in Germany at the beginning of the year, is likely to continue to play a certain role in investors’ allocation decisions in the second half of the year. However, with the increasing implementation of risk-mitigating strategies on the issuer side (risk provisions, portfolio restructuring and disposals, etc.), the risk of this issue flaring up again seems rather low in our opinion.