DZ HYP publishes the German Pfandbrief Market Report 2018/2019
19.09.2018
» ECB's monetary policy determines direction of yields and swap spreads of German pfandbriefe
» Harmonisation of European covered bond frameworks also likely to bring changes to the Pfandbrief Act
» High ratings of pfandbriefe continue to benefit from solid legal foundations in Germany
Europe has a major influence on the German pfandbrief market. For the moment, the European Central Bank (ECB) still determines the direction of yields and swap spreads in the European covered bond market with its ongoing expansive monetary policy. This also applies to German pfandbriefe. Since the beginning of the year, pfandbrief swap spreads have widened slightly, although this trend is more pronounced in the case of longer-dated bonds from ten years upwards than at the short end of the maturity spectrum. The most important reason for this general trend which can be observed in the covered bond market is the decline in purchase volume under the ECB's third covered bond purchase programme (CBPP3). From 2019, it is likely that only redemptions from the various ECB bond purchase programmes will be reinvested. Whether covered bonds which mature will be reinvested in the same asset class is not yet clear. Assuming that redemptions from CBPP3 in the first half of 2019 are reinvested evenly in the covered bond market over the first six months of the year, this would mean a monthly purchase amount of EUR 2bn, i.e. half of what the ECB was still purchasing at the beginning of 2018. Support for swap spreads is therefore set to decline. However, expected ECB purchases should prevent any general surge in risk premiums. The harmonisation of European covered bond frameworks is progressing. The European Commission published its proposal for a directive on covered bonds in March 2018. Further adjustments will have to be made, especially in relation to the definition of suitable covered assets and requirements concerning the homogeneity of the cover pool. On the whole, though, the principles-based draft can be seen as very successful. The German Pfandbrief Act is likely to require a number of adjustments in the detail in light of the directive, but in many respects, it is likely to have been the source of ideas for the European framework. The regulations should be published by the spring of 2019 at the latest if this European project is to be completed before the forthcoming European elections which are likely to take place from 23 to 26 May 2019. After publication, it would be the turn of member states of the European Union (EU) to implement the new guidelines from Brussels into national law. The process should not be detrimental to pfandbrief holders. The pfandbrief's strengths include a solid framework in law which provides a resilient foundation for the high credit worthiness of this asset class a fact which is recognised again and again by the rating agencies.