PARIS (Reuters) – Issues of covered bonds represent 140 billion euros in the first half of 2023, and could reach a record level this year since 2011, according to specialists in these bank bond securities, a situation which is explained by the tightening of the monetary policy of the European Central Bank (ECB).

Issues in the first half reached 140 billion euros, a volume last reached in 2011 and which represents 70% of last year’s issues, while the volumes maturing in 2023 are lower, 125 billion euros against 138 billion in 2022.

Covered bonds are backed by a portfolio of mortgage or public sector loans, which secure the security in the event of default by the issuer, systematically a credit institution in the euro zone.

REFINANCING

“This substantial level of supply is explained by the repayment of longer-term refinancing operations III (TLTRO III) and the refinancing needs of maturing bonds”, explain Societe Generale’s rate strategists.

Banks have borrowed a total of some EUR 2.1 trillion from the ECB in recent years under TLTROs, taking advantage of very advantageous conditions, intended in particular to encourage lending and stimulate economic activity when the euro zone was then faced with a risk of deflation.

These loans are now reaching maturity, the tightening of the central bank’s monetary policy involving a restriction of liquidity granted to banks, which must diversify their sources of financing.

However, covered bonds offer a cheaper alternative to senior securities: the yield on the iBoxx EUR Covered index reached 3.52%, compared to 4.37% for the iBoxx EUR Bank Senior index, while the deposit rate of the ECB reached 3.50%.

“Investor demand has recovered beyond specialized funds, which have represented the bulk of non-ECB buyers in recent years, the spread having become positive again and the asset offering carry opportunities”, of the order of 3.6% to 3.8% on a three-year title, notes Olivier Peythieu, bond manager at Amundi.

“The end of the ECB’s purchases forces issuers to better respond to investors’ appetite for short-term securities, in order to take advantage of the inversion of the curve”.

Issues have therefore focused on short maturities to attract investors, securities with maturities of less than 5 years representing around 60% of the volumes issued in 2023, and the phenomenon could intensify as the ECB stops its latest purchase program of covered bonds (CBPP3) in July.

As part of its asset purchase programs, the ECB captured a large share of primary issues, with purchases representing on average 30% to 40% of the volumes issued.

RECORD LEVELS

Emission dynamics are set to slow in the second half of the year, but emissions should nevertheless reach record levels in 2023.

The market is historically seasonal, with issues in the first half representing between two-thirds and three-quarters of the year’s volumes, but market players are counting on volumes ranging from 50 to 80 billion euros of additional issues.

In fact, there are still 590 billion euros of TLTRO to be reimbursed, including at least 108 billion in 2023, while Italian banks have only started issuing since June, the European directive allowing them to issue under this standard n not having been transposed before.

Moreover, a large part of the covered bonds issued since 2020 had been deposited with the central bank against liquidities, and not placed on the markets: the refinancing of these 275 billion euros of securities, according to the ECB, will take place at least partly via traditional covered bond issues.

Finally, the credit portfolios remain sufficiently well endowed not to limit issues yet.

“In 2024, we expect fewer issuances, as volumes of mortgage products will certainly be down, while TLTRO repayments will come to an end,” concludes Isabelle Vic-Philippe, head of Euro-Aggregate at Amundi.

(Report Corentin Chapron, edited by Kate Entringer)

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