Yield pick-up

Yield pick-up offered by Pfandbriefe

Pfandbriefe offer investors an attractive yield pick-up over government bonds. The German Jumbo-Pfandbrief is a fixed-rate paper which, like government bonds, stands for first-class credit quality. In some cases, Pfandbriefe even pay a yield pick-up over bonds of smaller European states, even though these are rated lower than Pfandbriefe.

Pfandbrief-Bund spreads (history)

Stated in basis points, Source: Commerzbank AG iBox

Spreads on the move

The Pfandbrief spread versus the Bund fluctuates over time. Whereas in 2000 in the 10-year category the spread versus the Bund was almost 70 basis points, the yield pick-up with 10-year Jumbo Pfandbriefe in 2005 was below 20 basis points versus comparable Bunds. After the effects of the financial crisis took hold following the insolvency of US investment bank Lehman Brothers, pick-ups at times even exceeded 100 basis points.

In the medium and long term, fundamental factors shape the spread between Pfandbriefe and Bunds. In this context, changes in the ratio between supply and demand in both markets are just as important as the overall interest level as well as the development of the individual credit spread.

An analysis of the spreads over time reveals that in phases in which investors have a strong preference for liquidity– as was the case, for instance, during the Euro crisis – the Bund-Pfandbrief spread is appreciably less wide than the Bund spread versus other security categories such as uncovered bank bonds.  

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