IFR Pfandbriefe Roundtable 2015
IFR’s 2015 Pfandbriefe Roundtable, held in Frankfurt on January 29 following our 9th annual Covered Bonds conference, was, as ever, a fascinating affair. For all the years IFR has been hosting conferences and roundtables on this segment of the bond market, there has not been a single event that has crystallised opinion to the same extent as the 2015 vintage.
The issue: the European Central Bank’s third Covered Bond Purchase Programme. Announced last September, launched on October 20 and running until June 2016. CBPP3 was a precursor to full-blown QE, whose €60bn of monthly bond purchases was announced days before the IFR Roundtable.
By mid-February, Eurosystem purchases of covered bonds had reached €46bn – of which 80% lifted from the secondary market. The sum of CBPP3 purchases was at that time already greater than the aggregate of the programme’s first two iterations.
While the ECB’s behaviour in the primary market had tempered slightly following the start of the year, its clumsy and ham-fisted bidding in the weeks after the programme was announced – at which time it was putting in massive orders and squeezing out real-money institutional investors and bank treasuries – ended up skewing market levels and undermining any notion of value.
Such was the contraction in spreads that some big buyside accounts have been threatening to ditch covered bonds in favour of anything offering better value.
The IFR event found issuers, underwriters and investors broadly on the same page, albeit with some counter views. Emotions ran high. People are angry and the language duly reflected that. People spoke of the ECB destroying the covered bond market; doing it serious harm; not thinking through the consequences of the programme; using covered bonds as a ruse to get full-blown QE through.
Does the ECB’s dual role, one participant asked – i.e. the market’s single biggest investor with unlimited buying power AND since November the eurozone’s principal banking supervisor – pose issues of moral hazard when borrowers see it aggressively bidding in the primary market and feel obliged to over-allocate at the expense of long-term investing clients? The consensus around the table said not, but it’s an issue worth pondering.
There was some discussion comparing the behaviour of the ECB today with some of the big funds that were huge buyers of covered bonds before the financial crisis. The Eurosystem is not an investor in the classic sense of the term; it is buying for political reasons. But by the same token, it is not going to flip bonds or dump positions in the same way as some of those funds did when the first signs of market distress started to manifest itself pre-2008. In that respect, it was argued that the ECB is the perfect investor.
On a positive note, the very act of buying covered bonds proves above all that, having rejected the idea of loading up its balance sheet with credit risk, it sees the instrument as safe and solid. If nothing else, that’s a positive point to bear in mind as CBPP3 runs its course.