Brave New Pfandbrief World
McCrary, Ernest, Global Finance
Pfandbriefe have entered a new era of international markets, pan-European availability, and even the zone of futures and swaps. Industry executives discuss the new order under Germany's left-wing government and January's start of the euro. Global Finance's Ernest McCrary moderated.
GLOBAL FINANCE: Reviewing 1998, what has happened with Pfandbrief pricing, investor demand, and issuance?
CHRISTOF M. SCHORNIG, executive director, co-head of treasury, DePfaBank:We saw tremendous Pfandbrief issuance in Q1 1998 due to strong demand and some play on the yield curve by investors. It continued to a lesser extent in the second quarter, but by Q3 the entire global market proved difficult for bond issuance.The eurobond market had shut down. We even saw that the jumbo market was working while local government bond markets were not easy to trade.The Pfandbrief's triple-A credit rating made it perform well during the global market crisis compared to other bond markets.
MARKUS HERRMANN, associate director, credit products research, Deutsche Bank: We have bright prospects in terms of the new European focus. Not only because we are competitive with other sovereign issuers, but our customers increasingly view Europe as a good market.
FRANK SCHUHARDT head of liquid bond trading,Trinkaus & Burkhardt: It wasn't a good year for market makers. The jumbo Pfandbrief futures market picked up speed early in the year, and then nearly collapsed. We had bonds for speculators who just use the pseudo liquidity of the jumbo market to extract their share from the market-making business. So the jumbo market was a good performer in terms of size and broadening the international investor base, but it has not been so good for market making between banks.
RAINER LENZ, head of bond analysis and strategy, DG Bank:The same applies for investors. It's positive that we have high liquidity, a higher market volume, and jumbo futures. But there are many problems as foreign investors try trading short and long positions. You need a liquid repo market. But mortgage banks started tapping their bonds when a lack in liquidity occurred, which made everything collapse, which is why foreign investors are now cautious.
CHRISTIAN HALLER, manager, global markets, Dresdner Kleinwort Benson:When compared to other markets, such as Italian government bonds, the Pfandbrief has done well. Now in Eastern Europe, Poland and the Czech Republic, as well as France and Luxembourg, are considering adopting German Pfandbrief laws. The spread widening in September and October has nothing to do with credit. The move into government bonds caused the spreads to widen, and that is why we've recently seen less interest from international investors. It has nothing to do with the quality of this instrument. I think that bond futures were not the right instrument with which to hedge the jumbo cash market position.This is why many traders lost money. The repo market has proved insufficient up to now, partly because most jumbos are still sold in amounts too small for that market.
GF: How do you see the economy developing next year, and how will it affect Pfandbriefe?
CARSTEN TEGTMEIER, head of international sales and investor relations, Nord/LB: There is still an ongoing discussion about the impact of the Asian and Russian crises on Europe. Germany's 1999 growth rates have been lowered a little.Japan finally attempting to get its situation under control is a positive. There won't be a negative impact on the Pfandbrief market, especially as the new government has accepted EMU and no massive increases in government debt are expected. The upcoming year should not be negative for the mortgage bond market, but there might be less growth.
STEFAN GOEBEL, assistant vice president, treasury,Allgemeine Hypothekenbank: A recession is unlikely. As to possible deficit spending, no government in euroland can act alone anymore. If the new German government wanted more deficit spending and the other EMU countries disagreed, they would apply pressure. …