Covered Bond Market Today

Richard Kemmish

30 years: Capital markets & covered bonds

The covered bond market is developing in exciting new ways. In this video of the series, Richard takes a look at the market as it stands today, and discusses how covered bonds can be fixed rate, euro denominated and used to fund mortgages.

Capital Markets

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Covered Bond Market Today

10 mins 53 secs

Key learning objectives:

Identify where covered bonds come from, and how the market has performed over the last two decades.
Explain the CBM features (types), and what they fund
Outline where the issuers come from, and how many

Overview:

The distribution of covered bonds outstanding is well balanced between several large countries with none having more than 20% of the total. German covered bonds represent 14%, and the market also consists of 24 smaller countries accounting for the remainder.

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Summary

How has the covered bond market performed in the last 20 years?

Overall, the market shrank from 2012 to 2017 before resuming its growth path in 2018. In the period from 2004-2012, the covered bond market grew by 1.3 trillion euros. The reason is because housing markets grew rapidly in many countries. Spain alone contributed over 300bn of total market growth along with other established countries such as France, Switzerland, Sweden and Denmark contributing a further 700bn Euros.

However, it has shrunk since 2012 due to: banks in general are borrowing far less as their balance sheets shrink and covered bonds have been squeezed by two other sources of wholesale funding.

What are the features of covered bonds? (types)

Big Deals
- Jumbo covered bonds - £1bn or larger
- Benchmark deals are those between £500mn and £1bn - representing 17% of the total market
- Smaller bonds for less than £500mn - these represent another 9% of the market
- The rest of the market consists of private placements - representing nearly 33%
Fixed Rate - Almost all covered bond investors only ever buy fixed-rate bonds. However, over 500bn is in the floating rate format
Euro Dominated – The covered bond market is generally dominated by the Euro. However, other currencies such as the Danish and Swedish Krone combined represent 21% of the overall market. Also, there has been growth in the Australian and Canadian Dollar investor base.

What does the covered bond market fund?

88% of the covered bond market funds mortgages
11% of issuance funds public sector bonds
1% is the portion of all covered bonds funding ships and aircraft

How many issuers are there, and where do they come from?

As of the end of 2022, the Covered Bond Council estimates that there are 325 active covered bond issuers in the world – 78 active covered bond issuers are from Germany, 27 from Austria and at one point in Spain, 68 issuers.

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Richard Kemmish

Richard is a consultant working mainly in the covered bond market. He helps Finance Ministries and Central Banks in countries without covered bond laws to put legal frameworks in place. He has also helped the European Commission with their legislative agenda for covered bonds and related products.

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