Rolling the Dice

ECB’s Bond-Buying Spree Might Backfire

Covered Bonds
German government bonds, called bunds, used to be the go-to investment for many international and domestic investors. But no longer.
  • Why it matters

    Why it matters

    • Buying covered bonds is a central plank of the ECB’s plan to increase lending and prevent the euro zone economy from falling back into recession.
  • Facts


    • The ECB plans to buy as much as €600 billion in covered bonds in an attempt to increase bank lending.
    • Demand for covered bonds already outstrips supply, investors say.
    • The ECB’s covered bond buying is part of a wider plan to expand its balance sheet by as much as €1 trillion.
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In Germany’s finance industry, the covered bond, or “Pfandbrief,” has an almost sacred aura. No wonder, because the principle of covered bonds goes back about 245 years.

Internationally, there are over €2.6 trillion ($3.3 trillion) covered bonds outstanding – €1.5 trillion of those from banks in the euro zone, especially from Germany, France and Spain.

“Covered” bonds involve creating pools of bank loans – mortgages or company loans – that can be sold on to investors but still remain on the balance sheet of the issuing bank. The fact that banks still have a stake in the loans makes them more secure.

These securities came under pressure during the 2008 financial crisis, but the market is now back in full swing. A covered bond has never failed, demand is great and interest payments are low. Banks can now refinance themselves via secured bonds more favorably than ever before. For bonds secured by mortgages, German banks pay interest averaging only 0.5 percent and for Spanish bonds just 1.3 percent.

All the more reason for the financial world to wonder why the European Central Bank is about to launch a program to buy these covered bonds – a program set to last for at least two years.

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