Has Brussles got the market covered? | Old product, new law | Investors force the pace
THE JUMBO COVERED bond market lives up to its name. At the end of June, the volume of jumbos outstanding was more than €600 billion. That’s roughly 40% of the covered bond market. And it is getting bigger. In the first half of this year, jumbo issuance set a new record, exceeding €78 billion, partly because new covered bond issuers gravitate towards jumbos.
The whole point of jumbos is, of course, that they are large. The first jumbo Pfandbrief deals in 1995 had a minimum size equivalent to €255 million. Today, jumbo Pfandbriefe must be at least €1 billion within 180 days of issuance, and the amount remaining in the market must not drop below that level.
But size is just a means to an end. The end is liquidity, and this also requires market making. So for a Pfandbrief to be a jumbo, a minimum of three joint lead managers have to commit themselves to quote two-way prices in lots of up to €15 million during trading hours. Bid-offer spreads range from five to 20 cents, depending on maturity.
For years, jumbo covered bond liquidity has been taken as read.