MyStratWeekly – April 16th 2024

Topic of the week: A peek at the euro covered bond market 

• 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.

Market review: The Euro, a Victim of Independence

• US inflation (3.5%) remains problematic;
• ECB to cut rates in June;
• Volatility returns in equity space;
• T-note diverges from Bunds, the euro plunges but credit holds steady;

Axel Botte's podcast

• Topic of the week: Market news, US inflation and consequences of the ECB meeting;
• Theme: An overview of the covered bond market.

Chart of the week

US consumer price inflation (3.5% in March) is still far from the Fed's target. Housing contributes significantly to high inflation readings, but there is also an upward trend in the prices of other services.

The "supercore" price index excludes housing and energy from the service sub-index. This represents an important measure of domestic inflation, in the context of persistent tensions in the labor market.

Supercore inflation has accelerated to 8% on an annualized basis over the past three months.