After a strong January, EUR benchmark covered bond issuance slowed in February and March. Some of the reluctance to issue may have been driven by Germany’s specialised commercial mortgage lenders, given rising tensions in commercial real estate.

Housing affordability is stretched and systemic risk a concern. Policy measures to improve financial system resilience can help. Germany might introduce borrower-based measures but they will need to be carefully calibrated to avoid further curbing supply.

Active covered-bond supply so far this year is testament to a functioning market, but the end of ECB asset purchases has shown that the waters can become choppy: issuers and arrangers have to take care around timing and investor appetite.

The covered bond market saw USD 187bn-equivalent primary supply YTD to 19 July. The pace of issuance caused some strains at the end of Q2 as buyers succumbed to fatigue, pushing issuers to adopt a more cautious approach to pricing into the summer break.

Existing ratings are not impacted

House prices fell in real terms in all but two countries of the EEA in the year to Q1 2023, led by Sweden with a 15.2% decline and Germany with 14%. Across Europe, there was a real weighted average fall of 8.4%.

The updated methodology, now final following a call-for-coment period, will apply to all covered bonds ratings.

Recent events regarding Credit Suisse and US regional banks have a direct read-across to covered bonds in that it was not credit quality but liquidity that led to the banks’ downfall, plus the crystallisation of market-value losses on high-quality assets.

The uncertain economic environment continues to push European house prices lower. But challenges are also crystallising in net residential mortgage lending, which nosedived to almost zero in the half year to February 2023, only slowly reverting in March.

Italy’s full transposition of the EU Covered Bond Directive paves the way for Italian issuers to return to the covered bond market. The updated legal framework is credit neutral to our governance support, allowing issuers to achieve the highest ratings.