ECB’s QE driving Pfandbrief yields to record lows

The European Central Bank’s Quantitative Easing programme is pushing German Pfandbrief yields to new lows, illustrated by Deutsche Hypo’s heavily oversubscribed, 0.125% 2022 bond this week.

German bond prices struck record highs this week after the ECB kept key interest rates on hold and reiterated its commitment to spend €60bn a month until September 2016. The yield on 10-year German government bonds fell to a record low of 0.107%.

Deutsche Hypo’s seven-year, €500m mortgage Pfandbrief issued this week was almost four times oversubscribed with strong demand from commercial and central banks across Germany, Austria and Switzerland. The cover pool consisted of mortgage loans on assets mainly in Germany, the UK, the Netherlands, France and Poland.

The Pfandbrief had a coupon of 0.125%, an issue price of 99.348% and a yield of 0.219%. Seven-year Pfandbrief bonds were yielding on average 1.35% 12 months ago, 0.75% six months ago, and 0.50% three months ago.

“As investors are still cash-rich, everybody is looking for returns,” said Jurgen Klebe of Deutsche Hypo’s Stv. Leiter Treasury. “This is the reason why they currently tend to invest into longer maturities, i.e., five years+ up to 10 years, sometimes up to 15 years. In our Pfandbrief case our seven-year issue was the ‘sweetest’, or steepest yield curve point.”

Demand is expected to remain strong up until the ECB’s scheduled ending of QE in Autumn 2016. Deutsche Hypo is targeting a funding volume of €4.5bn for 2015.