Sector stance: Since mid-April, covered bonds have been able to recover most of their COVID-19 related losses. Going into next year we are concerned about potential crowding-out risks in light of the expected strong supply volumes by the EU. However, these are at least partly offset by the expected negative net supply in 2021, the ongoing ECB buying under CBPP3 and PEPP and the strong domestic central bank support for non-Eurozone issuers in the form of liquidity facilities and covered bond purchase programmes. Balancing the crowding-out risks with these technical factors supporting the covered bond market, we keep our sector stance for 2021 at neutral.

 Supply: Year-to-date issuance has been quite low and remains well below the EUR100bn threshold for a number of reasons, including the TLTRO programme. Net supply is negative, approaching the EUR20bn mark. For next year, we expect gross supply to increase to EUR110-120bn. Given the higher redemption volume of EUR131bn in 2021 compared to last year (2020: EUR118bn), net supply volume should still be negative.

 Green, social and sustainability (GSS) covered bonds: The trend towards GSS covered bonds remains intact, with year-to-date EUR supply amounting to EUR8.1bn. The share of GSS covered bonds in year-to-date issuance was 9%, compared with less than 5% in 2018 and 2019. Moreover, the number of issuers of GSS covered bonds has more than doubled over the last two years, to 30.

 Covered bond harmonisation: The new Covered Bond Directive and Regulation entered into force on 7 January 2020. EU countries must have transposed the directive into national law by 8 July 2021, which shall then be applied starting 8 July 2022 at the latest. While some countries such as Germany, Denmark and Norway are well advanced in the process, others may face more problems with the 8 July 2021 deadline.

 Brexit: The end of the Brexit transition period on 31 December is approaching fast and there is still not any trade deal agreement between the UK and the EU. However, we maintain our neutral recommendation on UK covered bonds as we view Brexit-related widening risk as limited. Even in the case of a ‘no deal’ Brexit scenario, UK covered bonds should retain a regulatory status in line with Canadian covered bonds.