Summer vibes from Frankfurt

While the temperatures approaching 40C recently have been materially higher than anyone would wish for in the summer, we left Frankfurt with no such ‘excessive’ feeling among the covered bond community in relation to the product.

Instead, the conference struck a positive ‘summer vibes’ undertone with limited reservations for any meaningfully unfavourable developments, and rather appreciating the resilience of covered bonds in the face of copious macroeconomic uncertainties this year, and pointing to a broader adoption of the asset-class via the advent of new jurisdictions, issuers and even the ‘covered bond like’ ESN product in 2026 YTD. As such, the covered bond community seemed to exhibit satisfaction with a ‘told you so’ performance of the covered bond market YTD, primarily in terms of the reception of new issue deals, as a host of reasons such as benign supply-demand technicals, decently attractive spreads and cross-asset RV, as well as good all-in yields to begin the year with have all proved helpful, as was expected heading into 2026.

To this end, while the very recent weakness at the beginning of the week of the conference was acknowledged, the community perceived this as not a sign of upcoming weakness in the market but rather a fleeting fatigue after what has been a busy H1 in terms of supply, including the highest EUR benchmark issuance volume in June since 2010. On that note, an earlier slowdown in the primary market ahead of the summer break would be welcome it seemed, but the ‘seller’s market’ that we have seen since the start of 2025 will likely persist post-summer too, according to some, given the dynamics prevalent at the end of 2025 are still largely in place. That being said, abnormally large orderbooks at the start of the year was cited as not necessarily a sign of solidity, as the traditional investor base of the product underscored their ‘quality over quantity’ mantra as opposed to a ‘flipping for quick profit’ mindset. Countering views, however, also suggested that covered bonds as a product have now gained an appeal among a much broader investor base compared to QE years – including fast money accounts at times – something we will have to live with as investor participation continues to evolve.

• In general, the community acknowledged that notwithstanding the strength in primary YTD, issuance windows have narrowed and accordingly issuers need to be nimble to execute in short timeframes. However, at the same time, it was also suggested that volatility has been fleeting, as the market has increasingly become desensitised to flip-flop headlines, and the resilience was not necessarily just a feature of covered bonds but that the broader credit market, barring a brief jarring in March, has also staged a good performance, while bund asset swap spreads have also remained largely stable which is something very different from what could have been expected in a potential risk-off scenario a couple of years ago.
• In terms of valuation, a ‘structural’ acceptance of tight inter-jurisdictional spreads such as the Anglo Saxons vs. Core was perceived as natural post-QE and amidst an evolving investor base, as well as in light of the good ratings of such issuers. At the same time, ongoing regulatory developments in terms of potential third country equivalence in the EU, a similar initiative in the UK, as well as certain local tweaks such as the proposal to upgrade covered bonds to Level 1 HQLA under Canadian LCR rules all point towards potentially sustaining these tight (if not tighter) differentials. Similar observations were also cited for compressed CB-SSA differentials as the fiscal story keeps CB and SSA (net) supplies on divergent tracks for now.
• A few risks to covered bond spreads were alluded to (such as potential volatility related to the US mid-term elections and French presidential election, as well as the impact of Fed behaviour on EUR rates) but more in a ‘good to be aware of’ or ‘brainstorming’ fashion rather than with any pressing concerns. On aggregate, the community deemed covered bond valuations to be generally attractive on an RV basis, if not on an absolute spread basis, likely retaining spreads in a sideways range in H2.
• Separately, a few other topics of discussion at the conference comprised this year’s elevated non-EUR issuance amid opportunistically better funding costs, diversification benefits even if that means paying up, and ongoing regulatory developments (such as the OPRR in the UK and modifications to Canadian LCR rules) which could sustain this trend going forward. Discussions on a wider adoption of ESN in terms of more issuers and jurisdictions, alongside ‘fixing’ its current, unfavourable regulatory treatment, also featured prominently, while the reduction of RWs for certain securitisations to 5% was judged unjustified given the same benefit was not handed to covered bonds, although they are structurally more robust and less complex. No headwinds to covered bond supply or demand were cited in this respect, however, and the community took comfort that the issue could be addressed in the future. Finally, the proposal to raise the covered pool eligible LTV of German residential mortgages to 80% from 60% was viewed as likely to come to fruition, making covered bonds a more attractive funding tool for German issuers without diluting the conservative risk profile as mortgage lending value standards, unique to Germany, would still be adhered to, and the 80% criterion is pretty much a global standard.