Covered bonds are an essential financing instrument for banks in the euro area.

ECB monetary tightening affects the covered bond market directly with the unwinding of CBPP3  holdings and indirectly with the TLTRO  repayment (freeing covered bond collateral).

Mortgage loans are the main collateral for covered bonds. Housing has been hit by higher rates so that bank lending to households for house purchase shrunk.

Covered bond supply should slow reflecting declining lending flows.

Covered bond spreads tend to compare favorably to other similarly low-risk asset classes.

The covered bond asset class

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    Axel Botte

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