German issuers have been key drivers of covered bond issuance so far this year. Although euro covered bond issuance slowed significantly in the first quarter of 2025 compared to previous years, Pfandbrief issuance held up well. By the end of March, the total volume of euro covered bonds reached EUR 53 billion, down from EUR 62 billion in 2024 and EUR 76 billion in 2023. In contrast, Pfandbrief benchmark supply was EUR 15 billion in Q1, only slightly below the EUR 16 billion issued in the same period over the past two years.
The slowdown in overall covered bond issuance was likely related to the fact that banks have fully repaid TLTRO loans to the ECB, while higher interest rates keep growth in residential mortgage lending muted, limiting banks’ funding needs. Consequently, bank funding teams may have prioritized issuing riskier tiers of bank debt, such as senior and subordinated paper, over covered bonds. Indeed, issuance of riskier ranks of bank debt picked up in Q1 compared to previous years. This was probably supported by the fact that senior preferred bonds were trading at attractive levels versus covered bonds (from an issuer perspective) and also because of expectations that the constructive investor mood that was present moving into 2025 could deteriorate with President Trump’s arrival in the Oval office (a scenario that indeed has played out recently). Interesting to note in this respect is the pick-up in covered bond issuance in April, following the shift to risk-off mode in financial markets.
German issuers have been among the most active players in the euro benchmark covered bond market. In the first quarter, the market saw participation from 16 German issuers and a total of 20 Pfandbrief transactions. Notably, only two issuers tapped the market twice in Q1, with one returning in April, and there were two dual tranche transactions. Additionally, several smaller Sparkasse issued sub-benchmark covered bonds, highlighting varied issuer activity.
In terms of net supply, the covered bond market kept growing during the previous quarter, but only thanks to Germany and growth was much weaker than in previous years. Comparing the volume of new issuance with the EUR 48bn of redemptions means that the covered bond market grew by roughly EUR 4bn in Q1 2025. This is only a fraction of the EUR 30 and EUR 40bn of positive net supply in 2024 and 2023, respectively. What is more, net supply of Pfandbrief was around EUR 8bn in Q1 this year, only slightly less than in previous years. Excluding Germany, net supply of euro covered bonds would have been EUR 4bn negative.
A monthly breakdown reveals that German issuers were most active in January issuing EUR 9.3bn in Pfandbrief, which constituted 63% of their total issuance for Q1. This percentage was slightly lower than in prior two years, but above the 50% share of January primary activity in overall covered issuance in Q1. In February, issuance of Pfandbriefe moderated to almost EUR 5bn, representing 32% of total German Q1 issuance, while new supply of Pfandbriefe was only EUR 750mn in March (5% of Q1 issuance).
April has already exceeded March issuance figures, with EUR 1.65bn in Pfandbriefe issued during the first two weeks of April, despite considerable financial market turbulence. This seems to bode well for issuance during the remainder of Q2.
Sharp drop in new issue premium due to strengthening demand
The lower volumes of new supply of euro covered bonds and more balanced net supply dynamics translated into favourable new issue conditions during the first quarter of 2025. As shown in the chart below, there was a significant decline in new issue premiums that issuers needed to pay when entering the market. In fact, the average new issue premium was approximately zero for German issuers, while it was slightly negative for non-German covered bond issuers (probably as they recorded net negative supply in Q1). Issuers were allowed to print their covered bonds at their existing curve given the strong investor demand. This was illustrated by a jump in the average bid-to-cover ratio this year compared to the same period last year, indicating investors preference for covered bonds.
Demand for covered bonds was likely supported by the still relatively attractive levels where covered bonds were trading versus senior preferred bonds last quarter (a situation that reversed during recent market turmoil). This attracted even more asset managers to the market. Also compared to the start of the primary market in previous years, 2025 stands out in a positive way.
In terms of tenors, issuance remained focussed on the short end and the belly of the curve. Still, three out of the 20 Pfandbriefe issued in Q1 had a tenor of 10 years, while one deal even had a 15y tenor. Although these deals were more than three times subscribed and issuers hardly paid a new issue concession, investor preference seems to be mainly in the shorter end of the curve. This was reflected by a recent dual tranche transaction in April where the 4y part attracted EUR 2.3bn of demand and the 10y part EUR 1.4bn. Having said that, conditions in the primary market for Pfandbriefe, and covered bonds more generally, have remained good despite the market turbulence. This was also confirmed by covered bonds being the first type of bank bond issued after markets had entered somewhat calmer waters. As such, covered bonds are again demonstrating their ‘crisis-proof’ nature, which could also support issuance in coming months.