4 questions for Jakob Reithmann, MEAG MUNICH ERGO Kapitalanlagegesellschaft mbh

As a covered bond investor, you generally sleep a little more peacefully than many other market participants during volatile periods. The structure of the Pfandbrief has proven itself over decades and various crises and therefore continues to serve as a stable anchor—especially when other supposed safe havens lose their stability.

However, I wouldn’t say with certainty that we’ve already fully passed the trough in market sentiment. The geopolitical situation remains fragile, and the markets are once again reacting much more to inflation, growth, and fiscal issues. At the same time, the stable quality of the cover pools and robust investor demand suggest that we are in a phase of normalization rather than at the beginning of a new period of stress. Volatility is likely to persist—but in our view, the fundamentals of the Pfandbrief market remain very solid.

Our base-case scenario remains one of stabilization. For the eurozone, we expect modest growth of 0.4% in 2026 and average inflation of around 3.0%. Against this backdrop, we consider it quite likely that the rate hike in June will be followed by another one before the end of the year. At the long end, we continue to expect higher yields. Our year-end forecast for the 10-year German Bund is 3.3%. Higher government spending and rising issuance volumes suggest that yields will remain above the levels seen over the past decade going forward. In our view, the conditions for covered bond investors remain attractive: solid fundamentals are combined with favorable supply-and-demand dynamics, as well as yield and spread levels that continue to offer attractive current income even for bonds with very high credit quality.

Many covered bond markets already operate with higher LTV limits today, so an increase to 80% would not be a major change. Experience from these markets suggests that this increases banks’ refinancing flexibility, broadens the pool of potential borrowers, and can facilitate additional Pfandbrief issuances.

The risk for the buy-side lies primarily in the loss of part of the conservative safety buffer. However, the loan-to-value ratio alone tells only part of the story. Ultimately, the quality of the cover pools is decisive. Here, more granular pool data and greater transparency could provide important additional insights for investors.

Yes, at least in certain cases and for specific maturities, I consider that entirely conceivable. The Pfandbrief offers investors a unique combination of high credit quality, regulatory privileges, and historically exceptional stability. Added to this is the typically substantial overcollateralization of the cover pools. For investors, several stress factors would typically have to occur simultaneously—such as an issuer default and significant disruptions in the real estate market—before the collateral values would be seriously called into question.

However, I would be more cautious about lasting effects across the entire market. Government bonds and government-affiliated issuers continue to benefit from regulatory advantages and, in many cases, higher liquidity. Furthermore, governments have fiscal and regulatory tools at their disposal to respond to economic challenges. Nevertheless, the current market structure shows that the traditional hierarchy can no longer be taken for granted. In a world of higher government debt and increasing spread differentiation, I can certainly imagine individual Pfandbriefe trading richer than comparable agency or Länder bonds at certain points in time.