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.