The Upside Down World of Covered Bonds

Berlin Hyp office building Budepester strasse
Berlin Hyp issued the first negative yield covered bonds.
  • Why it matters

    Why it matters

    Issuing new covered bonds is easier thanks to demand created by ECB bond buying. But banks worry private investors will be driven away.

  • Facts


    • On average, 64 percent of all Pfandbriefe, or covered bonds, being traded have negative yields.
    • The European Central Bank is a pillar of demand for covered bonds. On average it purchases €10 billion of covered bonds per month.
    • Last year German banks issued €58 billion worth of covered bonds, an increase of 27.5 percent from the year earlier.
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There was a time when private investors regarded covered bonds as an attractive alternative to government bonds, but that was long ago.

In the current environment of rock-bottom interest rates, many covered bonds, known as Pfandbriefe in Germany, are in negative-yield territory, making them of little use as a direct investment.

That hasn’t stopped them from being in tremendous demand. Many private investors remain indirect holders of the bonds because asset managers and insurance companies continue to invest in them. And then there’s the European Central Bank, which has been buying up as much as €10 billion per month since last year as part of its massive quantitative easing program.

“As long as covered bonds offer a little more yield than German government bonds, they remain attractive for institutional investors,” explained Jens Tolckmitt, managing director of the VDP Association of German Pfandbrief Banks.

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