The development of risk premiums on covered bonds during the coronavirus pandemic
Economic Commentaries, News In this Economic Commentary, the author examines how yields on covered bonds, also commonly known as mortgage bonds, developed during the coronavirus pandemic until the beginning of the summer of this year. Like all market rates, these yields are affected by expectations of monetary policy and by risk and liquidity premiums. In addition, they are affected by specific factors on the market for covered bonds and by the funding terms of individual institutions.
Differences in maturity and coupon rates mean that it may be misleading to compare bond yields directly to each other. Consequently, a measure – a type of yield spread or premium – is calculated here that makes it possible to highlight the part of the development of the yield that is specific to the covered bond market and that makes the bond yields of the various institutions comparable.
This measure shows that yields on institutions’ bonds with a maturity of between three and five years rose in connection with the outbreak of the pandemic in March 2020 but then fell sharply until autumn 2020. The turbulence that prevailed in financial markets and the fact that many measures were implemented at approximately the same time by both central banks and governments, both in Sweden and abroad, makes it difficult to determine how much the Riksbank’s various measures contributed to this. On the other hand, it can be noted that the premiums specific to covered bonds, which initially increased during the pandemic, fell to virtually zero after the Riksbank offered to buy bonds. The yield spread between institutions’ bonds also shrank and yields also fell for covered bonds that the Riksbank has not purchased.
By Jan Alsterlind. The author works in the Riksbank’s Monetary Policy Department