Full-year 2023 euro benchmark covered bond supply is expected to fall short of last year’s record following a slump in issuance this month and last – barring a rush of pre-funding – while early forecasts for 2024 suggest a decline in supply but post-CBPP3 capacity questions.

Year-to-date issuance of some €175bn is slightly above the turn of the year average full-year forecast for 2023 of around €173bn, with a bumper first half having surpassed expectations. But after full-year forecasts were lifted on the back of the first six months’ supply, a drop in the run-rate has seen expectations fall back again.

“While we all got excited about the record supply before September this year, full years upply of euro benchmark covered bonds is, in the meantime, unlikely to top the €199bn in fully year 2022,” said Bernd Volk, strategist at Deutsche Bank.

Including today’s €500m Iccrea Banca deal, October supply has been €10.25bn, less than half October 2022’s total, after September also disappointed, meaning that, for the first time, year-to-date issuance in 2023 has fallen behind last year.

LBBW: Benchmark issues, year-on-year comparison (EUR m)

Source: Bloomberg, LBBW

However, some analysts noted that the market had been receptive to benchmarks from Helaba and SpareBank 1 Boligkreditt last week, raising the possibility of supply picking up and pushing 2023 volumes towards 2022’s record. Markus Herrmann, senior investment analyst at LBBW, said it is entirely possible that November could prove to be a strong month for issuance, citing pre-funding ahead of the new year as a potential contributor to such an eventuality.

However, DZ Bank analyst Thorsten Euler expects pre-funding to be weak this year.

“In our view, the currently rather difficult and volatile market environment for new issues could lead to issuers postponing planned new issues until next year,” he said.

“Overall,” added Euler, “the postponement of new issues originally planned for 2023, together with significantly lower pre-funding for 2024, should increase issuing pressure in the coming year.”

DZ Bank: Covered bond market should grow significantly for the third year in a row in 2024 (EUR bn)

Note: shaded columns = DZ Bank Research forecast; Source: Bloomberg, DZ Bank

DZ Bank today forecast €170bn of euro benchmark covered bond supply for 2024, which – given redemptions of some €116bn, would result in net growth of €54bn for the market. Taking into account CBPP3 maturities of €33bn, this implies that private investors will have to increase their covered bond holdings by around €87bn, according to Euler.

“In 2024, new supply is likely to be traditionally high at the beginning of the year as well,” he concluded. “However, if the current uncertainty about the further development of interest rates and inflation persists, investor interest could be noticeably more selective and price-sensitive than usual at this time of year with increased investment demand.”

Frederik Kunze, NordLB floor research, meanwhile foresees ongoing potential for European Central Bank measures to influence 2024 dynamics, even if the distortions caused by its purchase programmes have declined. Among factors playing into covered bond supply, he cited the central bank’s impact on: the effect of interest rates on mortgage demand and lending; the relatively higher cost of senior funding in periods of market volatility; a potential earlier than planned halt to PEPP reinvestments; and an adjustment to minimum reserve requirements.

“Overall, however, we believe that the covered bond market and, in particular, the euro benchmark segment, is exposed to fewer specific distortions here and hope that there will be no ‘cannibalisation à la CBBP3 and TLTRO II/III’ once again,” said Kunze.

NordLB expects euro benchmark supply of at least €150bn-€155bn.

“However, the figure is subject to the specific funding in the current year,” added Kunze. “Spreads are likely to have largely completed their repricing at the end of 2023 and increased ‘somewhat’ from their current levels.”