Roundtable: Markets reopen into an unclear future

Julien Marchand, NordLB: I expect a good volume of funding in the second half of the year. However, I don’t think we will reach those record levels, at least not this year. Our forecast for 2024 is €160bn-€170bn in benchmark format. Right now, we’re at €105bn-€110bn, so we still have €50bn-€60bn to go.

Yassir Berbiche, Fédération des caisses Desjardins du Québec (CCDJ): I completely agree with this figure. In our case, Desjardins is one of the only Canadian banks to have used the euro market so far this year. Many Canadian banks have instead issued bonds this year for capital reasons. Senior unsecured spreads were very attractive compared to covered spreads, making the covered product less attractive for issuers aiming to increase their TLAC [total loss-absorbing capacity] ratios. We’ve had amazing balance sheet growth this year, driven mostly by the mortgage book, which is why we’ve been more active in covered than the others.

Eivind Hegelstad, SpareBank 1 Boligkreditt: Our funding requirements this year have been impacted a little bit by slower growth in mortgage origination, meaning we probably have marginally smaller needs this year compared to previous periods. However, we still have funding to do in the second half. For us, I don’t see a big shift, but for the market in general, volumes are a little bit pulled back due to credit growth being more benign.

Richard Kosecky, Slovenská sporitelna: I agree with Julien — we will not see another record year and various factors will have played a role. Firstly, balance sheet development is very important — the current and the future development of core assets, liabilities, and deposits; secondly, there is the maturity or redemption profile of long-term funding; and last, but not least, yield and spread level expectations. This is the tricky part from an issuer’s perspective, as we see plenty of potential negative risk events in front of us. But there are also positives on the horizon — like central bank rate expectations, still attractive spread levels and new investors — that can support the covered bond market.

For us, covered bonds are still a key pillar and main source of our long-term funding. And, of course, as we usually only enter the market once a year, we are relatively flexible in timing our transactions, which means we will wait for stable conditions.

Tara Parmar, Nationwide: Speaking on behalf of the UK, just from looking at recent results and disclosures, it seems like many UK banks are well ahead of their 2024 funding targets. So, from that perspective, we’re not expecting there to be significant funding requirements in the later months of 2024.

Sanna Eriksson, OP Financial Group: Last year we did €3bn, and that was our plan when we started this year. However, we issued €1bn in the first half and we plan to do another €1bn, so there will be one deal less compared to last year. As others have already said, this is because of decreased demand for the mortgages and deposit growth. I think this will be perspective shared by many other issuers.

Parmar, Nationwide: For UK issuers, the extent to which global elections will impact covered bond markets is likely to be limited. Regarding the UK government, they’ve been quite open around their policies and the market has already baked them in, unless something drastic is revealed in the October budget.

Of course, the outcome of the French election was a little bit more complicated, since the fate of its government is uncertain. This could, of course, lead to potential volatility in the future and reduce execution windows, not just for French issuers, but for issuers across Europe. And then you have the US election, where we might see a few curveballs. But the dollar market, is not somewhere we are looking to tap in the near term due to the wide valuations.

Dominique Heckel, La Banque Postale: There was a positive pick up in loan production before the announcement of France’s snap elections in June. However, since the announcement this dynamic has faded and we have seen in the last few weeks that loan production is weaker. We hope that going forward we will see better loan production, helped by lower rates.

But of course, the political context is still worrying. There are still some discussions to be held about the budget and potential fiscal concerns. The spending programmes of the left-wing alliance could put pressure on the markets, especially on OATs, and in turn might put pressure on French covered bond issuers. After the announcement, spreads have widened by maybe 5bp-6bp, so not that much and it have stabilised since. But let’s see how markets will react when we have a bit more colour about the situation.

Henrik Stille, Nordea Investment Management: I think volatility in general will move up during the autumn ahead of the US presidential election. However, there are also a lot of other things that could cause volatility over the next three months. Meanwhile, from a seasonal perspective, the autumn is usually a bit more volatile.

We are trying to look at exposures that are not so costly to have that can perform in more volatile environments. We think covered bonds are quite attractive on an asset class level versus broader credit markets. We saw over the last two weeks that even when we got strong sell-offs in the equity market and spread widening in the credit markets, covered bonds remained quite stable. And I think covered bonds have a strong buffer due to current valuations. I don’t think the first 20bp move wider in the broader credit markets will spill over much into covered bonds.

Wojtek Niebrzydowski, CIBC: We’ve experienced over the last few years quite a bit of resilience in accessing covered bond markets. It goes back all the way to the first few weeks of Covid, the market was open, at least for us. Same with the Ukraine situation, same with SVB and Credit Suisse. Not to be overly optimistic, but I wouldn’t expect markets to be inaccessible because of election-type events, but you never know.

Rather, our issuance plans are driven by a combination of factors. Firstly, what’s happening with our balance sheet dynamics. With deposit balances being generally stable or increasing, it’s a function of all asset growth, and not necessarily just mortgage growth.

We also look at our funding programmes on a holistic basis: a euro or dollar raised through one funding programme can fund any type of assets. As a Canadian bank, we cannot issue senior preferred, so all our senior unsecured funding is effectively senior non-preferred. We must factor in what our TLAC ratios are, and what the comfort level is with regard to the buffer from management’s perspective.

Last but not least, we run some of our programmes, including obviously covered bonds, to maintain a periodic presence in key selected markets. And euro covered is definitely one of our key selected markets.

Parmar, Nationwide: The impact of central bank interest rates on retail markets is very relevant. On the deposit side, we have seen a shift of cash from non-interest bearing accounts, such as current accounts, into interest bearing ones. What this means, is that there’s been strong growth in our retail deposit volumes. And then on the mortgage side, we’re finding that many retail borrowers are carefully considering when to lock in a mortgage rate. As a result, although our mortgage origination flows are stable, they aren’t particularly robust.

This shift in consumer behaviour has also influenced wholesale funding needs, with some UK issuers reducing their secured funding requirements. For example, Nationwide initially guided to £7bn-£9bn [$9.21bn-$11.85bn] for this financial year, but it now appears likely that funding will be at the lower end of that range.

Recently the Bank of England has begun its interest rate cutting cycle, which is expected have quite an impact on mortgage decisions, such as remortgaging and house purchases, going forward. Rate cuts could improve affordability, which has been a barrier to entering the UK mortgage market in recent years. As we’re starting to see interest rates decrease, we do anticipate a reduction in deposits and an increase in mortgage originations.

But of course, there is a lag effect, and much will depend on the actions of central banks moving forward.

Kosecky, Slovenská sporitelna: The path going forward is unclear, but based on macro figures like CPI and looking at expectations, we might see lower interest rates and, potentially, a pick-up in loan origination. Looking further into the future, higher upcoming redemption levels in 2025-2028 will play a part in dictating supply. As of today, there’s about €140bn in 2025, another €160bn in 2026, and similar — if not higher — figures in later years. Together, these are the most important factors for determining supply volumes from our perspective.

Berbiche, CCDJ: For Canadian banks, 2023 saw notable increases in both deposits and loan origination. Deposits grew by approximately 6%, providing a strong funding base, and I think that this year is roughly the same. But going forward, I expect Canadian banks to utilise the euro covered bond market, as my colleague from CIBC just said, to support their funding requirements, be it growth in mortgages or other types of assets.

For Desjardins, 2024 is still a strong year of funding, but mostly driven by strategic growth outside of Quebec. We don’t do mortgages outside of Quebec, so this growth is coming from our corporate loan book. This business book growth implies a greater funding need, and the European market is one of the key markets we look at to meet this. We might look at another transaction this year in the covered space.

Marchand, NordLB: That’s always the big question — and I believe no one has a crystal ball in the office that could give you a firm answer. However, I believe that at the moment you see already a quite elevated level. There has been some tightening this year, but as Dominique pointed out, in June some banks, especially French ones, were affected by widening.

In my view, I believe for the rest of the year we’ll see a rather sideways trend, which could still mean some small tightening or some small widening, depending on the general market environment. But honestly, I don’t see a huge widening going forward. As Henrik pointed out, covered bonds look attractive against other asset classes, which should keep the widening risk limited. Yes, there might be some net supply going forward; however, I think with new investors coming to this asset class, that will be manageable.

Stille, Nordea Investment Management: The way we see it, is that interest rates are too high. I expect both the ECB and the Fed will cut interest rates down to neutral levels over the next 12 months — maybe even a bit faster than what the market is pricing. This should probably create a good environment for covered bonds, if the market doesn’t think the ECB is behind the curve. As long as the market doesn’t see a hard landing or stronger recession, there will be spread performance.

However, a sell-off in risky assets could spill over into covered bonds. If I need to have a view, then I would say that we will go wider over the next six months due to my quite pessimistic view of the overall economy.

Niebrzydowski, CIBC: As an issuer, the absolute spreads are really a secondary consideration. Rather, the way we normally look at things is on a relative value basis vis-à-vis domestic senior unsecured, which probably 75%-80% of the time is the cheapest senior unsecured to issue.

Right now, looking at our funding matrix in the five currencies where we issue covered bonds, the tightest spread versus Canadian dollar senior unsecured for a five year is 53bp in Australian dollars, while the widest is Swiss francs at 67bp. These are still fairly attractive relative value deltas, and in stressed markets these numbers have risen into triple digits. Before Covid, these relative values were on average in the mid 20s, but high 50s to mid 60s are very attractive levels, if term funding needs don’t include capital instruments.

Hegelstad, SpareBank 1 Boligkreditt: Even though we are active in a smaller market, we still look at things on a relative value basis across the various currencies that Wojtek mentioned. But we are a little bit driven by absolute euro spreads, because what happens in euros spills over via the basis swap market into our domestic covered bond spreads. As a result, our domestic spreads tend to align with euro levels.

We ask this question too: where are spreads likely to go? Although we’re going to fund anyway — it’s an independent decision to do funding — it’s still interesting to look at where spreads are going. You don’t want to issue at a time where you think that maybe things are going to become more volatile.

The reduction of the ECB’s [Pandemic Emergency Purchase Programme] holdings, which are mostly SSA and government bonds, could have a spillover effect on covered bonds. The central bank is going to sell several billion of SSA bonds on a monthly basis, which could weaken the SSA sector.

But on the other hand, we have Julien’s starting argument that mortgage borrowing is slightly weaker, leading to maybe a more moderate level of issuance. And so that’s what it comes down to, supply and demand. Altogether, and it’s hard to say, we might get a moderate widening in spreads over the remainder of the year.

Parmar, Nationwide: We’ve seen the opposite in the UK, where we’ve tightened 10bp-15bp across the curve since January. Speaking specifically for Nationwide, but I’m sure our UK peers are quite similar, we’re now pretty much in line with or just back of our European counterparts.

There was this dynamic for a long time that the UK needed to print back of core European countries, but the spread widening from the heavy supply in these jurisdictions versus the limited supply seen from the UK has given us the opportunity to access euro markets at very attractive levels.

We saw that first hand when Nationwide’s recent 10 year covered bond priced on the cusp of many core European issuers’ secondary curves at mid-swaps plus 38bp in early May. It’s a big change from what we saw last year, when euro spreads had widened.

Stille, Nordea Investment Management: Compared to 12 months ago, I would say that from a political point of view, the UK suddenly looks like one of the more stable countries. The UK just had an election, and the government has a large majority in parliament. This looks a lot more attractive compared to the situation in France, for example. And these are two sovereigns with the same rating, but you are then compensated with higher spread levels for UK risk.

Berbiche, Desjardins: As a treasurer, we always look at relative value, because at the end of the day, what we do with those spread levels is transfer the pricing to our line of businesses, and they have to adjust their pricing accordingly. I’m not saying that we are spread agnostic, but we have to look at those figures in relative value.

Returning to the first question we had at the beginning of this roundtable, we were talking about probably €160bn-€170bn of issuance this year. Redemptions are more than €220bn so we’ll probably get a net activity of roughly between €50bn-€60bn in euros. Many issuers, like ourselves, front loaded their activities in the first half of the year, so we may see certain stabilisation in spreads during the second half because of the lack of probable funding and the lack of issuances in euros. But it’s really difficult to predict.

Kosecky, Slovenská sporitelna: I believe that our spreads are at, or close to, peak levels. As a result, we are now seeing some investors look more at covered bonds, especially as risk premiums on riskier bonds, like unsecured ones, have narrowed.

Stronger than expected inflows of deposits for many issuers, including us, could influence pre-funding activity as banks pull forward their funding plans. This would definitely be supportive for spreads and risk premiums in the short run. I personally see very good value in [Central and Eastern European] issuers with good potential for spread tightening in the future.

And why do we still have relatively high spreads? I think we pay a price for being a relatively new market, we pay a premium for CEE risk, and I think we pay a premium for our relatively low liquidity in the secondary market.

Heckel, La Banque Postale: From a spread perspective, as previously mentioned, we have a specific situation for French issuers. We have received feedback from some investors that they are a bit cautious about the situation, and as a result, a French issuer might have to pay a bit more premium when coming back to the market. And from this perspective, I think it’s a positive thing that most of the French issuers have already completed a big part of their funding programmes for the year. I don’t rule out some pre-funding from those names that are quite used to adding some funding throughout the year. But of course, I think that there could be more pressure for French names. However, at the same time, this would offer some relative value compared to other jurisdictions, and that will help to keep spreads under control, in a way. So, I’m not too worried.

Usually during the euro market summer break, we see some spreads tightening, with no primary activity. But this year, when you look at how spreads are behaving, nothing is tightening. It will be interesting to follow the first trades a bit later this month, because when you don’t have any performance in secondary and when there is no primary, what will happen once you get a bit more activity? I think it’s maybe better to try not to be the last one. Or if you can, wait a little bit until after the wave of issuance that we might see in the second half of August.

Marchand, NordLB: It’s definitely changed since spreads and absolute yields have increased.

You have investors like Henrik and Nordea, who have been present in the market for ages, but we’ve also had investors who were absent during the low yield period return now that they see value in the asset class. There are names that haven’t bought covered bonds for years now back in the market.

At the beginning of the year, some of the more credit-related investors were active as well in covered bonds. This was a question of relative value as the covered bond product looked more attractive versus other asset classes. And, of course, investors have been allocating more cash to fixed income in general over the last few years.

Will this dynamic persist? Difficult question. We will have to see.

Eriksson, OP Mortgage Bank: I’ve never spoken as much about covered bonds in [investor relations] meetings than I am now. About a third of the investors that we’ve seen are totally new ones. As well as this, we’ve also spoken to older accounts that previously looked at senior products and are now interested in covered bonds. It’s been a quite interesting development to see so many new names and faces — it’s really nice.

Kosecky, Slovenská sporitelna: In our case, we do not expect any dramatic changes in the structure of our investor base. Generally, covered bond books are dominated by bank investors, but we continue to see real money investors coming back again and sticking around in the product. These real money accounts mainly want to lock in current yield levels in anticipation of falling interest rates going forward. Geographically, investors from Germany and Austria are the most important for us. We also see and expect growing interest from the Nordics and other countries like France due to the higher spreads.

Stille, Nordea Investment Management: Yeah, I’d much rather see these other investors than the ECB. I mean, first of all, we have had much more interest from our clients to invest in fixed income in general. And this is something that I think has just started. Since interest rates have been so low for a decade, many institutional investors are way too underweight in fixed income. When I speak to them, they are still way below something that they can call neutral.

And then, of course, covered bonds are no longer trading at artificially tight levels due to quantitative easing programmes. Covered bonds are one asset class that most investors look at when they plan to allocate into fixed income rates or safe fixed income products. And currently covered bonds look attractive versus the broader credit markets — you don’t give up much in yield and you get lower risk and volatility.

Many of the clients that we meet are also quite concerned about sovereign debt sustainability. And there you have the risk that if the governments continue to run these deficits around the Western world that will lead to more supply of government bonds. But you don’t get this risk in the same way in covered bonds, because covered bond supply is tied to mortgage production. In the short run, there is, I think, more risk for underperformance on government bonds due to supply pressure compared to covered bond markets.

Hegelstad, SpareBank 1 Boligkreditt: The average five year historical average has been 25% fund managers in the books and about 45% banks. But that 25% has now risen to 33% for 2024 year-to-date, compared to the last five year historical average. Meanwhile, the central bank share has dropped from 22% to 13% and hedge funds have grown from 1% to 4%. There has been no real change in the bank share, but funds and hedge funds are taking significantly larger volumes.

Niebrzydowski, CIBC: As Canadian banks, we never had the benefit of a central bank buying significant pieces of our issuance, so we’ve always been exposed to market discipline.

We’ve consistently said to ourselves that diversification matters. Having been present in the markets for a number of years, we feel reasonably comfortable that if currency X doesn’t work, then there will be sufficient demand in currency Y or Z.

We are always happy to see new investors, but we’ve never historically placed specific, outsized reliance on one type.

Marchand, NordLB: There are ample reasons for entering the covered bond market.

For example, the new German players previously relied on the private placement market. However, in recent years, investors have required some level of liquidity and prefer to invest in benchmarks instead of private placements. So, if this source of funding disappears, you need to find a different way to fund on a relatively cheap level. There you have covered bonds.

On the other hand, for non-European investors, the euro covered bond market offers a very diversified and deep investor base compared to other currencies. At the end of the day, it is always useful not to focus on only one currency or product.

And as Wojtek already mentioned, even on a rainy day, the covered bond market still allows you to approach the capital market and get a good level of funding done at attractive levels.

Hegelstad, SpareBank 1 Boligkreditt: We should also add that many of the new German banks and others have extensively travelled Asia to pitch for these issuances and have some success.

Kosecky, Slovenská sporitelna: We started issuing benchmarks in 2019. However, we then issued less in 2020 and 2021 because of how our balance sheet was taxed. If we pre-funded during this low spread period, the cost to our balance sheet was too high — even if we could print at a negative yield. But in 2022 and 2023 we were a much more active funder because of strong mortgage growth, allowing us to even place two benchmarks in a single year. Launching and building out this benchmark programme was a very smooth process. All five of our trades so far went very well.

Eriksson, OP Mortgage Bank: Speaking as the deputy chairwoman of the ECBC [European Covered Bond Council] I want to say that as more issuers debut, it shows that we have succeeded in making the euro market the place to be. I think it is important for all of us because it makes the euro market larger.

Kosecky, Slovenská sporitelna: This year in Slovakia we had a new issuer come to the market — Československá obchodná banka — and achieve a strong outcome. The success of these inaugural trades could help CEE issuers with their future projects.

Parmar, Nationwide: Echoing Sanna, euros are, of course, the deepest market and where the product is most understood.

Because deals from new entrants continue to be really well received, it makes sense for non-Eurozone issuers to keep looking at this market. I’m sure there’ll be more entrants in the future.

Looking at Nationwide more specifically, one of the reasons we like to issue in the European market is because we’re one of the largest covered bond issuers in the UK, and so we place a lot of emphasis on diversification. Historically, sterling and euros have been our core markets. Sterling is the cheaper market for us to issue into, but given the size of our funding requirements, we can’t raise all of it in a single market. And even if we could, it wouldn‘t be prudent for us to do so.

Alongside euros, we’ve expanded our reach to Swiss francs and US dollars and more niche currencies in private placement formats.

We are one of the only issuers in the UK that looks across the curve as well, and we look at euros in particular to extend our duration. This is really important to us as a lot of the other asset classes we issue into are short dated. So, this gives us the opportunity to have a longer maturity profile.

Niebrzydowski, CIBC: If the question is, what motivates us, from our perspective? Well, we have a C$1tr balance sheet, of which, on the liability side, about C$100bn is funded one year and longer. We are, and have been for quite some time, a global funder, not only from a covered bonds perspective, but also from a senior unsecured perspective. We have issued senior unsecured public benchmark transactions in one more currency than we have covered — we have not sold yen covered bonds.

The euro is the oldest, the deepest and most liquid market. The logical conclusion would be to start there. But that is not to say that diversification is not very important as well.

Hegelstad, SpareBank 1 Boligkreditt: Diversification, of course, is important, but, as we talked about a little bit earlier, it’s supply and demand that sets the spread. And you know, if there’s a lot more supply coming, spreads tend to go up because there’s a little bit of pressure.

But we’d like to see the development of demand. For instance, people talk about the Canadian wave from time to time, but we’d like to see a Canadian investor base develop and Canadian dollar covered bonds that complement the euro market nicely.

As a market, new names generate positivity as the market grows and develops.

Heckel, La Banque Postale: Well, with the French legal framework on the [sociétés de financement de l’habitat], I think duration is always a bit tricky because you must manage the gap between the loans and your issuances. As a result, issuing too short is never a good thing.

We are always trying to make use of market windows when we have the capacity to issue between seven to 10 years. On average, we are close to the average maturity of our assets, and we don’t necessarily need to go very long.

Of course, we also look at the cost of getting this extra long duration, and that is always something we have to take into consideration, as well as having a large investor base that is looking at this issuance.

Hegelstad, SpareBank 1 Boligkreditt: I’m not tied to doing 10 years or any other maturity. Instead, we just try to space it out a little bit to ensure we meet the normal prudence rules for maturities and duration of funding. And because 10 year was available, we took it in May. As you said, Frank, it hadn’t been available for quite some time with the volatility in the market. So, when the opportunity arose, we took it, knowing full well that bond wouldn’t have got as much demand as a shorter dated maturity would have at that time. I think we could have easily had double the order book on a shorter deal — but we knew that going into the trade and were happy with the outcome.

Parmar, Nationwide: We had a funding need of around €1bn and euro pricing, especially in the tenors we considered, had narrowed against sterling. With potential market headwinds later in the year, it made sense to take advantage of the favourable market conditions.

Since we had recently issued a seven year sterling bond, it made sense to diversify, and although UK issuers hadn’t tested duration beyond seven years in the euro market, technical indicators gave us confidence that a 10 year bond was feasible. Knowing the 10 year space typically had lower demand than the belly of curve, we paired it with an option that could attract more interest as well as limiting each tranche to €500m to maintain pricing tension to achieve our funding goal. Additionally floating rate notes have seen a resurgence in demand where they offered attractive pricing for investors and, for us, a technical arbitrage when swapped back on our balance sheet. We found the weighted average cost of the two tranches priced just inside where a new seven-year bond would have, making it a cost-effective choice.

Parmar, Nationwide: The developments that we see in are still in a conceptual stage. Before third country equivalence can be implemented, the European Commission needs to produce a report to justify the need for such a regime. This would then be followed by a legislative proposal that translates these technical requirements into law. And finally, a comprehensive assessment of third country covered bond frameworks would be needed before equivalence is granted.

Now this process is expected to still take several years, with the earliest implementation indicated to be unlikely before 2026. Of course, we do want equivalence as an end result.

Without equivalence, non-EEA covered bonds will continue to be treated less favourably under European regulations, consequently suggesting that we would need to offer higher yields compared to our EEA counterparts to compensate for this. But we haven’t exactly seen that. Recently we’ve seen European covered bond spreads widen, but this, in turn, hasn’t forced UK spreads to widen.

We’re finding that at the moment, and of course this may change, that investors are welcoming the rarer UK names, despite not having that third-party equivalence. And we’ve seen first-hand that UK-issued euro deals have had significant participation from treasury and Liquidity Coverage Ratio buyers. And although we want to get to a place where we have equivalence, at the moment, it seems there is more positive sentiment towards UK issuers with less weighting on this topic.

Niebrzydowski, CIBC: Well, Tara, I admire your optimism. Your talk about 2026 reminds me of a joke: “What’s the definition of a pessimist? It’s a converted optimist.” It’s an old one, but to perhaps state the obvious, we’ve always supported level playing fields. Now, having said that, I’ve been hearing equivalency for probably five, six years. We are in the middle of preparing an industry response to the [European Banking Authority] questionnaire that covers equivalency among other things.

Ultimately, it would be great to have it implemented, and we would fully rely on Henrik and his counterparts to decide — based on publicly available information — which credits are worth narrower spreads, and which are worth wider spreads. I’m hopeful we will, but I’m definitely not holding my breath for 2026.

Berbiche, CCDJ: We cannot be against those rules because, at the end of the day, they’re poised to enhance market integration and competitiveness.

I think that non-EEA issuers would benefit from narrower spreads and market access, while EEA issuers will probably face increasing competition but would likely retain a strong position due to their established market presence and higher credit standards.

Heckel, La Banque Postale: We see more and more green and social covered bonds, which is a very positive development for the market and for diversification. There is a quite interesting difference between standard and sustainable covered bonds when it comes to global demand and granularity. We do see larger orders from the big players, but also much more granularity within the books.

Eriksson, OP Mortgage Bank: Investors are really eager to buy green and sustainable deals and are asking us for them.

I need to renew our framework under the new covered bond act and I’m just wondering what to include in it to make it long lasting. So maybe can I ask Hendrik what are your thoughts? I think it’s challenging at the moment to make these decisions about what kind of sustainable format we should use.

Stille, Nordea Investment Management: We are trying to implement broader sustainability models where we look at the whole cover pool, and not so much at the individual bonds that are issued. For instance, we will look at the energy efficiency of all the mortgages in the cover pool, not just those in a green bond.

But in the end, it’s up to our clients. If they agree with this model when we present it to them, then going forward it will not be as important for us to buy green bonds. We could then justify buying a covered bond that is not green, as long as the cover pool shows very strong sustainability criteria.

Overall, the feedback we get from our clients is that they want us to look more at the cover pool. They think basically it’s too simple to just buy green bonds.

Eriksson, OP Mortgage Bank: We get these questions no matter if it’s a green covered bond or a regular one. Previously, it was only green investors that would ask these questions, but now accounts ask them all the time. It’s more about how sustainable an issuer is as a whole, not just the collateral in the cover pool.

Stille, Nordea Investment Management: Looking at an issuer as a whole is not so new, but until now it’s been difficult to get enough data on the cover pool that would allow us to evaluate how energy efficient the mortgages are. More and more issuers can now supply this data, and more will start to do so.

Mortgages are a very important part when it comes to bringing down CO2 emissions and improving the energy efficiency of housing. It’s a very important component and it’s difficult as a covered bond investor, to say that we don’t look at the cover pool, we just buy green covered bonds.

Marchand, NordLB: ESG-labelled covered bonds are a great thing. I believe the reason why we don’t see a bigger share in the covered bond market of either green or social covered deals is that it is more attractive to use this ESG potential for senior unsecured bonds.

At the end of the day, how should an issuer choose between a green covered and a green senior? The execution risk is higher on senior issuance and therefore I would use the label there. As Dominique already pointed out, you increase the potential investor base by having an ESG label.

There are always discussions about whether these deals offer any kind of greenium. I don’t know if there’s any academic work on this one, but I think in general, people tend to say a covered bonds saves 0.5bp-1bp, whereas on the senior side you’re saving much more. Putting this into real money terms, it’s a lot more attractive to use the label on a senior deal. And, of course, there are a wider range of potential assets that you can use for senior bonds.

But I do think a lot more investors are taking a more holistic approach when it comes to assessing issuance. For a lot of accounts, it’s important that the issuer as such, including the cover pool, can be considered as sustainable.