Five questions for Rico Noack, DKB

The success of our 20-year Public Pfandbrief in times of global geopolitical tensions can be attributed to investors’ confidence in the stability and solidity of Pfandbriefe on the one hand and in our proven business model on the other. In addition, we have noted increased investor interest in longer maturities over several months, which has aligned very well with our needs for funding in this maturity bucket. Clear communication during the execution of the deal, DKB’s sustainable orientation and stable economic situation certainly also contributed to investors’ decision to participate in this transaction.

As one of the leading municipal financiers, DKB has always focused on lending to local authorities in recent decades. From DKB’s perspective, we would therefore not speak of a ‘renaissance’. Local authorities currently estimate their accumulated investment backlog in public infrastructure at EUR 186 billion. In addition, local authorities will face considerable additional investment needs in the years to come as a result of sustainability and climate legislation. Due to significantly higher social expenditures, local authorities will no longer be able to finance these investment needs from their current revenues. Despite the one-off financial injection of EUR 100 billion from the special fund for cities and municipalities, we therefore expect growing demand for public sector loans at local level.

Whether the Public Pfandbrief will go through a renaissance depends on various factors, such as the demand for secure and sustainable investment instruments and political and regulatory developments. Given the stability of the instrument and the expected growth in public sector credit demand, it is quite possible that the Public Pfandbrief will regain some of its former market share.

For us at DKB, public-sector covered bonds definitely rank alongside Mortgage Pfandbriefe, reflecting the importance of the underlying lending business.

The Social Pfandbrief format has gained importance in the context of ESG efforts in recent years, but still ranks far behind green formats. For the medium term, I see great potential for social aspects to become even more important within ESG. Protecting vulnerable groups from the consequences of climate change and defusing the powder keg that unaffordable housing represents for society are driving forces behind this issue in politics, business and society.

In view of the ECB’s continued interest rate cuts and the associated shift at the front end of the yield curve, as well as the expected higher supply of Bunds, interest rates at the long end of the curve are likely to remain stable or even rise if inflation expectations and the economic situation improve. I therefore expect the yield on 10-year German government bonds to be in a range between 2.5% and 3.0% at the turn of 2025/2026, depending, of course, on geopolitical and global economic developments, further monetary policy and inflation expectations.