The primary market for covered bonds – review H1 and outlook H2

1. Market environment and issuance

‘Positive’ because the number of transactions developed swiftly in January – not record-breaking, but at a historically high level. ‘Cautious’ because transactions in the primary market were secured with some very attractive reoffer levels, which was primarily reflected in the oversubscription rates: only two of the 29 transactions closed in January had a book-to-cover ratio of less than 2x – the average was over 4.5x.

However, with 19 transactions in February followed by only 12 in March, it became clear that something was amiss. Covered bonds were caught between a rock and a hard place: on the one hand, rising yields on sovereigns and related bonds attracted investors’ attention. Conversely, issuers took advantage of the narrower spreads between unsecured and covered debt to reduce the size of their covered pools and refinanced via unsecured debt. The latter can be seen as a sign that, despite all uncertainty, confidence in the banking sector was and remains encouragingly sound.

This sandwich position slowly dissolved between the end of March and mid-April: sovereigns became more expensive, which in turn created performance potential for covered bonds; and this was reasonably well exploited. By the beginning of May at the latest, issuance was in full swing. June 2025 was even the most active June in 15 years; back then – in 2010 – it was supported by catch-up effects following the successful bailout of Greece. However, in contrast to the beginning of the year, this record-breaking run was no longer driven by perceived excessive caution: the oversubscription ratios for transactions in May and June averaged a sustained and stable 2.3x, with a few outliers above and below this level.

2. Market segments and maturities

From January to June, around EUR 104 bn in covered EUR benchmark bonds were issued. This volume was distributed across a total of 125 transactions. Of this amount, EUR 51.7 bn were accounted for by 65 transactions in the second quarter.

The transactions originated from 23 countries, which matches the broadest market coverage achieved so far in 2022. There is a good chance that a 24th country will be represented, as there has been no benchmark activity from the Czech Republic to date. However, this has been the case regularly since 2021. A #25, on the other hand, would be a major surprise. After an absence of 16 years, the Hungarian covered bond market has already achieved this.

For the first time in six years, the top spot in the country breakdown has changed hands: with EUR 24.55 bn, German Pfandbriefe are just ahead of French covered bonds (EUR 23.9 bn) at the end of H1 2025. There have also been changes in the following ranks. Norwegian issuers placed EUR 8.25 bn in the first half of the year, followed by Australian issuers (EUR 6.1 bn) and Canadian issuers with EUR 5.25 bn. Compared with last year’s activity, covered bonds from France, Canada, Italy, Austria, the Netherlands and Finland in particular have potential to catch up. Canadian issuers have already shown a high affinity for issuing in the third and early fourth quarters in the past. Covered bonds from Norway and Australia are already above expected volumes for the whole of 2025.

However, 2025 was not only record-breaking in terms of market activity in June and market breadth. At 36.5%, the volume-weighted share of 5-year securities was higher than ever since the beginning of the ‘Jumbo era’. The flagship 10-year maturity accounted for only 8.9% of the volume placed – one of the lowest figures ever– undoubtedly reflecting the ‘cautiously positive’ market sentiment mentioned at the outset. The 20-year Pfandbrief issued by Deutsche Kreditbank is particularly noteworthy in this context. It is the first 20-year benchmark covered bond since 2022 and is also one of the top 10 longest benchmark covered bonds ever issued. Thanks to the clever choice of maturity date, it was also the longest EUR benchmark Pfandbrief ever issued.

3. Gross-net analysis

The EUR 103.8 bn in newly issued covered bonds in H1 has been offset by EUR 83 bn of maturities. This results in net market growth of EUR 20.8 bn. Excluding the pandemic years 2020 and 2021, this is the lowest figure since 2017. However, EUR 83 bn in maturities was also historically high. The reason for high maturity volumes is the strong issuance activity in 3- to 5-year tenors during and after the pandemic. There is no indication of a change in the near future, with high redemptions expected in the next six months: around EUR 57 bn is still due to be repaid by the end of December. By contrast, we expect new issues to total little more than EUR 50 bn by the end of the year, which translates to a market contraction in the second half of 2025. Overall, net market growth is likely to remain subdued in the coming years: at least EUR 150 bn will regularly fall due, reaching a peak of EUR 183 bn in 2027.

4. ESG trend slow but steady

ESG-compliant covered bonds accounted for a growing share of issuance volume in the first half of the year. Around EUR 13.6 bn in 18 transactions were placed in the form of green, social or sustainable covered bonds – this corresponds to around 13.3% of the total volume, compared with 12.6% in 2024, 10.6% in 2023 and 9.4% in 2022.

Despite the still much larger share of conventional cover assets, this signals the ongoing integration of sustainable financing structures in the covered bond market. However, a key challenge remains the lack of transparency at the cover pool level. The European Banking Authority (EBA) is currently reviewing whether standardised ESG disclosure requirements for covered bonds should be introduced.

5. Spread development: resilience

The shock waves from Russia’s attack on Ukraine in March 2022 also reached the covered bond market, causing the trading range between more expensive and cheaper covered bonds to widen. In the 5-year segment, this range widened by around 25bp. The wave of TLTRO redemptions and the associated additional issues, primarily from Italy, provided a further boost in March 2023 and widened the yield spectrum for 5-year covered bonds to 41bp. A peak was last reached in August 2023; since then, the entire covered bond market underwent a sustained compression. Excluding Italian OBGs, trading ranges are back at February 2022 levels; OBGs still have around 5bp of catch-up potential.

Compared to the ‘neighbouring markets’ SSA and senior unsecured bank bonds, covered bonds proved relatively resilient to the volatile news environment. Before and during the turn of the year, when political and fiscal uncertainties dominated the headlines particularly in France and Germany, SSAs were significantly more affected (#1 in the chart), while trade policy developments across the Atlantic were far more of an issue for unsecured debt instruments (#2 in the chart).

6. Outlook for the second half of 2025

Seasonal factors traditionally play a major role in the covered bond issuance calendar. In this respect, we expect business to remain brisk from mid-September to the end of November. Assuming gross issuance will reach approximately EUR 110 bn by the end of July, a good EUR 40 bn should still be printed in the 12 weeks to the end of November, which would equate to around four transactions per week. As already mentioned, Canadian issuers were often very active in the third and fourth quarters. Austrian, Belgian and Finnish issuers have also been conspicuous by their restraint to date, which allows conclusions to be drawn about potential issuance activity for the rest of the year.

With regard to spread development in the remainder of the year, Helaba Research expects Bund swap spreads of -10bp in the 5-year and 0bp in the 10-year range, which corresponds to a sideways movement of the trend that has been ongoing since around April. In view of the low or even negative net issuance of covered bonds expected until the end of the year, the supply side suggests that spreads against swaps will remain fairly stable. The compression of the entire covered bond spread spectrum is still active, but should slowly subside given that pre-pandemic levels have largely been reached. We still see potential for Italian covered bonds in this context.

From a regulatory perspective, we expect the EBA’s proposals on the further development of the CRR and the CBD, particularly with regard to third-country equivalence, to reach us before the summer break. This would provide plenty of intellectual entertainment for the summer holidays and lay the foundations for fruitful discussions, for example at the Global Covered Bond Congress in Seville in mid-September.