We expect covered bond issuance volumes and spreads to move sideways in 2025. Our forecast for euro benchmark covered bond issuance is EUR 155bn, basically unchanged from 2024 (EUR 153bn), which was 10% below our expectations but still the third highest volume in a decade.

“Covered bond spreads widened throughout 2024 and were close to 50bp on 10 January, the highest in a decade. But this was driven by technical factors rather than any perception of increased risk by investors, so is not a concern from a rating perspective,” said Mathias Pleissner, deputy head of covered bonds. “On the plus side, wider spreads attracted real money investors back to the covered bond market.”

For issuers, senior unsecured spread levels in both preferred and non-preferred buckets suggest it currently makes more sense to fund unsecured and keep collateral unencumbered. This also supports our view of a sideways move in issuance volumes in 2025.

A quarter of euro benchmark covered bonds last year came from French issuers, allowing France to retain pole position for the fifth year in a row. This year, Denmark is likely to regain its global top position, although issuance will continue to be predominantly in DKK. In the euro market, we expect a gradual expansion of activity from CEE issuers and smaller, infrequent and private placement-focused issuers. This will add further diversification to the market.

“Neither the final Basel III transposition into CRR3 nor the upcoming review of the European Covered Bond Directive, including topics such as European Secured Notes and third-country equivalence, have implications for the credit quality of covered bonds,” said Karlo Fuchs, head of covered bonds. “Nor will evergreen topics such as ESG-labelled covered bonds or digitalised/blockchain covered bonds be credit drivers, although both topics will provide food for thought in upcoming months.”

In fact, no significant regulatory changes are pending that would require amendments to covered bond frameworks. The European Commission report on ESNs has been delayed until at least mid-2025, coinciding with the European Banking Authority’s timing to provide feedback following the Commission’s call for advice. EBA feedback on third party equivalence is expected by mid-September 2025. That could see preferential treatment extended to non-EU covered bonds.

“When it comes to covered bond collateral performance, lower interest rates and an expectation of further rate cuts in 2025 will continue to lower risk for commercial real estate exposures, revive growth in residential house prices and improve affordability for homeowners. But while our outlook generally remains stable, political tensions and economic turmoil may impact covered bonds in 2025,” Pleissner cautioned.

Fuchs pointed to a number of potential pressure points: “The credit quality of European public-sector collateral could face risks stemming from sovereign rating deterioration, residential mortgage pools could be exposed to higher defaults driven by rising unemployment and/or inflation, while commercial real estate may suffer from weakening demand and headline risk, particularly in light of ongoing economic uncertainty,” he said. “But even if credit risk were to increase, we do not expect it to negatively affect covered bond ratings.”

Download the 2025 Covered Bond Outlook here.

And join us for our Banking Outlook webinar on Tuesday 21 January at 15:00 CET where representatives of Scope’s banking team will deliver their thoughts and perspectives on the key themes to watch out for. Register here.