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By Bernd Volk, Director, Deutsche Bank

Given the current environment, fixed income assets are undoubtedly expensive. As of the 24th of October 2016, the share of negative yielding bonds in the iBoxx EUR Covered index was 74%. This compares to 45% in the case of the iBoxx EUR Sovereign index. Peripheral countries account for 23.7% in the iBoxx EUR Covered (Spain 15.5%, Italy 6.5%, Ireland 1%, Portugal 0.6%) compared to 38.6% in the iBoxx EUR Sovereign (Italy 23.9%, Spain 12.8%, Ireland 2%).

Even though a part of the difference in the share of negative yielding bonds between the iBoxx EUR Covered and the iBoxx EUR Sovereign can be explained by the country distribution (and also by differences in duration), most euro area covered bonds trade tight versus underlying sovereign bonds. Moreover, on top of historically low absolute yields, also versus swaps, covered bonds trade close to historically tight levels. However, with no covered bond investor having suffered a loss in recent history, in contrast to sovereign bonds, relative value remains an open discussion, particularly in the case of covered bond markets that are relatively small and therefore easier to exempt from losses.

CBPP3 tapering happening already

Generally, settlements under the European Central Bank’s (ECB) covered bond purchase programme (CBPP3) were significantly lower after the summer break compared to settlements before the summer break. In recent weeks, the CBPP3 purchase rate was at the lowest since the programme started. Mainly driven by low issuance of EUR benchmark covered bonds by euro area banks, average weekly purchases under CBPP3 have amounted to EUR 1bn since July compared to EUR 1.7bn in the first half of the year.