Covered bond primary market faces worst year since 2002!
Apparently, a little was still too much! In November 2020 we had forecast a meagre EUR 90bn for the new issue volume of euro benchmark covered bonds in 2021. At mid-year, a look at the primary market offering of only EUR 46.3bn to date reveals that our already pessimistic forecast was apparently even too optimistic, as from January to June usually significantly more than half of the annual new issue volume is placed (average since 2002: 63%).
Of course there are some arguments that could speak for a certain revival of new issue business in the second half of the year. These include for example the continued good new business in mortgage loans, the total outstanding volume of which within the eurozone increased by 5.2% to EUR 4.8 trillion between May 2020 and May 2021, according to our calculations based on ECB data (2020: 4.4%, 2019: 3.9%). On the other hand, however, there are two heavyweight arguments that, in our view, speak against above-average primary market activity in the second half of the year. The TLTRO III tenders offered to the banks by the ECB for refinancing are simply too attractive in times of shrinking interest margins for the institutions to do without them. In addition, the deposit base continued to grow during the corona pandemic, further reducing the need for capital market refinancing.
All in all, we believe that this will lead to comparatively few covered bonds being publicly placed in the second half of the year - despite the arguments for more new issues. We are therefore reducing our new issue forecast for euro benchmark covered bonds from originally EUR 90bn to only EUR 75bn for 2021. With maturities of EUR 131.6bn, we therefore expect a net new issue volume of minus EUR 56.6bn - according to our data, the largest minus in the history of this segment. With outstanding volume of euro benchmark covered bonds totalling EUR 844.7bn as of 30 June 2021, this corresponds to a drop of a whopping 6.7%. At the same time, the annual new issue volume of EUR 75bn would be the lowest since 2002.
-- Thorsten Euler