The volume of covered bonds outstanding rose to Eu2.5tr in 2010, according to data published by the European Covered Bond Council. Analysts expect high levels to be maintained, noting that issuance has been increasingly publicly placed rather than being deposited with the ECB.

In 2009 outstanding covered bond volumes were Eu2.4tr. Last year Eu606.7bn of new covered bonds were issued, versus Eu529.8bn in 2009.

Denmark had the highest total issuance last year, at Eu148.6bn, followed by Germany (Eu87bn) and Sweden (Eu80bn).

Bernd Volk, head of covered bond research at Deutsche Bank, noted that the Eu2.5tr total compared with Eu940bn of euro benchmarks currently outstanding.

“Despite very challenging market conditions currently, with only around Eu40bn of euro benchmark covered bond redemptions in H2 2011, chances of a further increase or at least no decline seem still good,” he said.

“It remains noteworthy that around half of euro benchmark covered bonds came from issuers which started issuing only in 2008 or later, confirming the structural change of the market.”

Mortgage backed covered bonds’ share of the total has increased, with public sector covered bonds standing at 24% of issuance in 2010, down from 29% in 2009 and 58% back in 2003.

The ratio of mortgage backed covered bonds outstanding relative to outstanding mortgage loans increased in all countries aside from the UK and Germany, where the ratio remained the same (although the data from Germany is difficult to interpret because “mortgage backed covered bond” also captures commercial mortgage collateral and some residential mortgage lending is ultimately financed through public sector covered bonds, noted analysts at Landesbank Baden-Württemberg).

LBBW’s analysts compared mortgage backed covered bond volumes with mortgage lending volumes and ABS issuance. They found that even in countries where securitisation has been increasingly used, such as Italy and Portugal, covered bond funding has increased its share of housing finance. In the UK the share of RMBS has fallen over the last two years, while covered bonds have held steady.

They also looked at volumes in the two asset classes relative to their use as European Central Bank collateral and found that fewer than 18% of eligible covered bonds are being used for refinancing via the Eurosystem — less than in 2009 and compared with 38% of available ABS.

“In other words, considerably more covered bonds were placed in the market or not acquired with the immediate intention of using them as collateral,” they said.

Mortgage backed covered bonds (outstanding as of 31.12.2010) as % of outstanding residential loans

Sources: ECBC, EMF, LBBW Credit Research