The Pfandbrief market 2024/2025 – review and outlook

Karsten Rühlmann
Landesbank Baden-Württemberg
01.2025
The primary market year 2024 was full of challenges for the Pfandbrief market. Despite this, performance was above-average with an EUR benchmark issue volume of EUR 28.75bn. ESG bond issues remained key. In an environment of falling interest rates, issue yields declined slightly. The start of the year 2024 in particular saw Pfandbriefs with longer maturities being placed again. However, relative value considerations concerning the swap/Bund spread came into focus toward the end of the year in particular, bringing issuance to a standstill. 2025 is set to remain challenging, with sustained pressure on risk premiums expected in the early part of the year in particular. When it comes to new Pfandbrief issuance, we expect the EUR benchmark volume to increase slightly to EUR 30bn.
Economic and (geo)political uncertainty, quantitative tightening by the ECB, interest rate uncertainty, strained relative value levels and headline risks in connection with US office property loans – the primary market for German Pfandbriefs faced numerous challenges in 2024. Despite this, it performed well on the whole.
At EUR 28.75bn, the EUR benchmark volume on the primary market for German Pfandbriefs declined by around 20% year-on-year in 2024 (2023: EUR 35.75bn). However, it enjoyed above-average performance in the context of the last 10 years (10-year average: EUR 25.7bn). Accounting for 20% of the total market volume, German Pfandbrief issuers took second place behind France (26% or EUR 38.5bn). More than two-thirds of the issue volume (EUR 19.5bn) was placed in the first half of 2024, including EUR 10.5bn in January alone. A total of 22 Pfandbrief issuers came to the market with 46 issues (2023: 19 issuers, 56 issues). At EUR 625m, the average issue volume was slightly lower than in 2023 (EUR 638m). Four banks made their debut in the large-volume EUR benchmark segment in 2024: SaarLB, OLB Bank, Sparkasse Hannover, and Lloyds Bank GmbH.
EUR benchmark volume y-o-y comparison
ESG bond issues remained key in 2024. In line with the market as a whole, the absolute volume was lower than in the previous year at EUR 5.5bn (2023: EUR 7.25bn), but the share of the overall market attributable to ESG remained at the same high level as in the two previous years at 19%. In addition to refinancing loans for energy-efficient buildings, affordable housing funded by social Pfandbriefs continued to play an important role. The Association of German Pfandbrief Banks (vdp) also updated its minimum standards for green Pfandbriefs in July 2024, with the requirements for green cover assets being aligned even more closely with the EU taxonomy. German issuers lead the way with an outstanding ESG covered bond volume of EUR 29.1bn, or a share of the global ESG EUR benchmark covered bond volume of 30%. Investors now have 11 issuers to choose from.
ESG EUR benchmark Pfandbrief Issues over time
As expected, the ECB began lowering interest rates in June 2024. By the end of the year, it had cut the key interest rate (represented by the deposit rate) from 4.0% to 3.0% in four steps of 25 bp. Our macro analysts expect the rate to be lowered further to 1.75% by the end of 2025. In an environment of falling interest rates, Pfandbrief yields also declined over the course of 2024. The average issue yield was 3.0% in 2024 compared with 3.2% in 2023. At 57%, more than half of issues were in the “≥2.5% to <3.0%” yield cluster. In the previous year, almost three-quarters of issues fell within the “≥3.0% to <3.5%” range. As interest rate uncertainty declined, it became possible to place longer maturities again in 2024, especially in the first half of the year. At 6.4 years, the average maturity of the Pfandbriefs issued in 2024 was one year longer than in FY 2023 (5.4 years). Almost half of all issues had a maturity of ≥7 years, with the maturity segment of ≥10 years accounting for 18%.
New Issue yields and maturities of EUR benchmark Pfandbriefs, FY 2024 vs. FY 2023
The investor breakdown reflects the fact that the ECB has entirely withdrawn from its CBPP3 bond-buying activities. Since July 2023, there have been no further reinvestments under the third covered bond purchase program. Accordingly, the share attributable to “Central Banks/Official Institutions” has now normalized at 13%. Asset managers saw a slight increase to 26%, driven by consistently attractive yield levels. As usual, bank investors led the way at 53% thanks to their investment focus on the regulatory benefits of Pfandbriefs in particular. In terms of origin, there was a notable increase in investors from outside the German-speaking countries (DACH region). For example, the proportion of buyers from Southern Europe and UK/Ireland rose slightly to 10% and 5% respectively. By contrast, the share of DACH investors declined slightly from 74% to 68%.
EUR benchmark Pfandbrief Investor breakdown by type and country over time
Toward the end of the year, the high overall primary market volume and the tangible increase in spreads led to issuance in the EUR benchmark covered bond segment coming to a standstill. This also included German Pfandbriefs, with the final Pfandbrief issue of 2024 coming from Münchener Hyp in late October. The narrowing of the swap/Bund relationship came into focus, placing considerable pressure on risk premiums for SSAs and covered bonds. As a result, Bund yields for longer maturities in particular found themselves trading at above the corresponding swap yields, with the swap/Bund relationship in the 10-year segment entering negative territory. The situation remains strained as we move into early 2025.
Risk premiums for German Pfandbriefs widened by 19 bp over the course of 2024, while Bund spreads widened by 39 bp. This meant the relative value of Pfandbriefs deteriorated, with a difference of 53 bp as compared to the 3-year average of 70 bp.
Swap/Bund spreads and relative value of Pfandbriefs vs. Bunds
Outlook
The challenging environment is set to persist in 2025, with economic and (geo)political uncertainties remaining key focal points. Pfandbrief issuers can absorb the resulting risks thanks to stable ratings as well as high rating buffers in most cases. The strict requirements of the German Pfandbrief Act also provide a strong safety net. As previously, Pfandbriefs will remain important to German banks in 2025 as an affordable and reliable funding instrument. However, investors will continue to keep an eye on changes in relative value. We expect the start of the year in particular to see efforts to identify a fair spread level. The first issues of the new year have already confirmed this view in the form of higher new issue premiums. However, above-average order books indicate healthy demand to date.
With regard to new EUR benchmark Pfandbrief issues, we are forecasting a slight increase to EUR 30bn. The gradual recovery of the real estate markets and the larger number of issuers are likely to be supporting factors. German issuers also benefit from a strong domestic investor base. With maturities totaling around EUR 23bn, net new issuance is again expected to be positive.