4 questions for Olaf Pimper, Commerzbank

Essentially, we manage a classic bank liquidity portfolio as Treasury. This means that our investments secure the bank’s ability to service all expected cash outflows over the next 30 days at all times. To this end, the supervisors provide us with clear guidelines and specify certain asset classes. Across all asset classes, it is important that they are liquid, i.e. can be sold quickly in an emergency. This explicitly includes Pfandbriefe and covered bonds, provided they fulfil certain requirements such as issue size and other regulatory requirements. Pfandbriefe and covered bonds are a very attractive investment for us, as they generally offer a higher yield or a higher spread than other asset classes. We are also very happy to buy green Pfandbriefe and covered bonds. On the one hand, we are convinced that green Pfandbriefe and covered bonds can make a major contribution to financing measures to mitigate climate change and, on the other, it increases another of the bank’s regulatory ratios, namely the ‘green asset ratio’.

At first glance, one might be surprised that there were so few new issues at the very outset of the year compared to previous years. January is traditionally the strongest month for Pfandbrief issues. On closer inspection, however, this picture is put into perspective and there are clear reasons for issuers’ cautious stance on the Pfandbrief market. Although Pfandbrief spreads are certainly trading at attractive levels in a historical comparison, covered bonds are currently having a difficult time compared to other asset classes. This is because Pfandbriefe and covered bonds are traditionally a product with which issuers can access longer maturities. At the long end of the curve, 7 years and more, there was a massive widening of spreads for European government bonds, supras and agencies at the end of last year. As a rule, these asset classes do not have to be backed by banks with regulatory capital, unlike Pfandbriefe and covered bonds. It is therefore often not attractive for bank investors to buy covered bonds when there are bonds to buy at the same spread or yield level that do not require regulatory capital charges. In my view, the spreads that many issuers would have to pay for long maturities appear to be simply too expensive, which is why they prefer not to issue long maturities.

The situation at the short end of the curve is quite different, but with similar effects. Here, the spread between covered and senior preferred bank bonds is historically narrow, meaning that it may be more attractive for issuers to issue unsecured bonds to keep their options open for future covered issues. This is exactly what we observed on the market at the beginning of the year. Issuing activity on the senior side is historically high.

The market is currently showing that the spreads of Pfandbriefe and covered bonds are not so much product-driven but rather dependent on other asset classes. Viewed on their own, Pfandbrief spreads are very attractive, but in reality and from a relative value perspective compared to other asset classes, we would probably need a spread tightening of government bonds, Supras and SSAs at the long end and/or a cheapening of senior unsecured bonds at the short end of the curve. At the moment, I see more opportunities for the latter. I think that certain credit investors will soon be recognising the value of covered bonds over senior unsecured bonds and adjusting their allocation accordingly.

We look less at the yield of a bond and more at the spreads, as we generally hedge the interest rate risk. I expect a sideways movement here for 2025. However, we expect volatility in the markets to remain high because there may be major uncertainties over the course of the year owing to political and economic developments. We are currently favouring shorter maturities of up to a maximum of 5 years in order to keep the duration risk low.