Covered bond market on the way to normalization

Erste Bank Research Team Erste Bank

We expect issuance activity on the covered bond market to normalize further in 2024. This means a further moderate decline in issue volumes compared to 2023 and, above all, compared to the record year 2022. This will affect both the overall market, where we expect a volume of EUR 170-180bn, and the Austrian market, which should reach an estimated issue volume of EUR 11- 13bn.

One of the main reasons for the expected decline in issuance volume is the dwindling influence of TLTRO3. Only around EUR 450bn of TLTRO3 tranches will be due next year. Part of this will also be refinanced by covered bonds in the coming year. However, we expect the impact of TLTRO3 maturities on the covered bond issue volume to gradually decline until the facility is repaid in full in December 2024.

Since the interest rate turnaround, credit growth at banks in the eurozone has slowed noticeably. Both a lower demand for credit and a tightening of lending rules have been observed. We expect credit growth to remain at a low level in the coming year. This should also have a dampening effect on issuing activity in the covered bond market.

The issue volume in the ESG covered bond segment has shown steady growth since 2021. The issue volume has also increased to EUR 21bn in 2023. We expect further moderate growth in the ESG segment of the overall covered bond market in 2024, with stable development expected for the Austrian market.

The trend towards higher risk premiums has continued in 2023. Covered bond swap spreads have widened continuously since the beginning of the year, with an increase in momentum after the summer break. In addition to increased risk aversion on the part of investors, we see the relatively high volume of new issues as the main reason for the widening of spreads.

In view of the expected lower supply of covered bonds and the already comparatively high risk premiums, we see a limited risk of a further significant widening of covered bond spreads in the coming year. A more stable interest rate trend should also limit the risk of wider spreads

Download The Full Credit Market Special

Author

Erste Bank Research Team

Erste Bank

At Erste Group we greatly value transparency. Our Investor Relations team strives to provide comprehensive information with frequent updates to ensure that the details on these pages are always current.

EUR/USD extends its optimism past 1.1900

EUR/USD retains a firm underlying bid, surpassing the 1.1900 mark as the NA session draws to a close on Monday. The pair’s persistent uptrend comes as the US Dollar remains on the defensive, with traders staying cautious ahead of upcoming US NFP prints and CPI data.

GBP/USD hits three-day peaks, targets 1.3700

GBP/USD is clocking decent gains at the start of the week, advancing to three-day highs near 1.3670 and building on Friday’s solid performance. The better tone in the British Pound comes on the back of the intense sekk-off in the Greenback and despite re-emerging signs of a fresh government crisis in the UK.

Gold picks up pace, retargets $5,100

Gold gathers fresh steam, challenging daily highs en route to the $5,100 mark per troy ounce in the latter part of Monday’s session. The precious metal finds support from fresh signs of continued buying by the PBoC, while expectations that the Fed could lean more dovish also collaborate with the uptick.

XRP struggles around $1.40 despite institutional inflows

Ripple (XRP) is extending its intraday decline to around $1.40 at the time of writing on Monday amid growing pressure from the retail market and risk-off sentiment that continues to keep investors on the sidelines.

Japanese PM Takaichi nabs unprecedented victory – US data eyed this week

I do not think I would be exaggerating to say that Japanese Prime Minister Sanae Takaichi’s snap general election gamble paid off over the weekend – and then some. This secured the Liberal Democratic Party (LDP) an unprecedented mandate just three months into her tenure.