Covered bond market on the way to normalization
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
Author
Erste Bank Research Team
Erste Bank
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