Key Messages
Risk assets are being fueled by a clean macro mix : AI-capex continues to support the growth narrative; disinflation is grinding lower and realized rates vol is back to QE-era lows even with policy rates still high. Equities keep re-testing highs as mega-caps carry earnings momentum forward, while the Fed's gradual easing bias and two-sided policy risks anchor curves. Credit spreads are tight but fundamentally supported by steady growth, robust IG margins, strong inflows and manageable net supply. In this set-up, we still expect a measured decline in yields that preserves the carry and maintains firm demand . European macro prints have ceased to surprise negatively, and Bunds remain range-bound, cushioning rate Beta. The point is not exuberance but a stable equilibrium of low vol and resilient technicals, which is the market context into which covered bonds step in 2026, with carry/roll doing the heavy lifting for returns.
Spreads are tight because inflows meet orderly calendars and benign rate vol, and because default risk looks contained with no maturity wall before 2028 and still-elevated recoveries . HY has shown the first hints of primary indigestion, but the weakness has not cascaded down the quality spectrum, and IG remains buffered by demand. The supply of covered bonds and SSAs has been well-absorbed in Europe, helping secondaries grind tighter or hold vs. EGBs. For covered bonds, sticky ALM demand, resilient primary execution and steady two-way liquidity have underpinned resilient performance vs. govies. As long as Bund-swap spreads behave and rate vol remains muted, carry and roll should remain monetizable in the belly.
Risks are not absent : stretched positioning in some equities, policy/fiscal wobble risk, and a potential rates repricing as 2026 EGB net borrowing plus QT lean on swap spreads. The “complacency check” also includes the idiosyncratic political risk in France and a possible long-end steepening in EUR curves. That said, the market supports of 2025 will remain largely unchanged in 2026 : low realized volume, demand that values carry, and supply that looks manageable for core IG and covered bonds. Near term, back-loaded redemptions cushion Bund ASWs; medium term, Germany's 2026 step-up in net borrowing and full-pace QT bias ASWs tighter, but the path is not linear.
Covered bonds' lower Beta to ASW moves vs. EGBs/SSAs and more manageable and predictable supply vs. the latter should help cushion any soft patch . In short, we expect 2025's positive dynamics to spill over into 2026, with risks monitored rather than front-run. Looking ahead to 2026, the preference skews to high-quality CBs/SSAs over outright EGB ASW longs given the mechanics around Bund ASW . This tilt reflects heavier German net supply and ongoing QT, which argue for a medium-term ASW cheapening impulse. In short, CBs and core SSAs look best placed to preserve carry while limiting rates-Beta into 2026 .
Overall, our 2026 portfolio construction blends CBs out to ~7Y with longer-end SSAs/EGBs, optimizing carry and liquidity . This strategy leans into diversification and mitigates the collateral/ASW shocks embedded in sovereign supply paths. We are mindful of the long-end steepening risks flagged by rate teams.
NBFIs & Private Credit Headlines
We see NBFIs and private credit headlines as the principal macro-credit risk for banks in 2026, eclipsing idiosyncratic bank factors for now . The combination of fast-growing BDC/private credit exposures and developing underwriting standards raises questions about risk migration outside perimeter banks. Banks' linkages via warehousing lines, distribution and co-lending represent channels for sentiment shocks. SRT transactions help manage risk-weighted assets, but selection, seasoning and structural nuances can still attract scrutiny. These SRTs deepen the bank–NBFI nexus by shifting risk and liquidity demands to buyers outside the regulated banking system. The ECB has argued for a broader macroprudential approach to NBFIs precisely to manage these externalities.
Regulators flag that NBFIs' weight in euro-area credit has risen materially over the last 25 years, changing intermediation channels and tightening linkages with banks . Funding models relying on market liquidity, leverage in some strategies, and maturity transformation create susceptibility to shocks. The ECB notes that strains in NBFIs can boomerang into banks through funding, securities holdings and risk-transfer transactions such as SRTs. Supervisors also highlight the opaqueness in private credit, where disclosure is thinner and valuations can be model-heavy. These features complicate surveillance and amplify pro-cyclical behavior when liquidity thins. The concern is not a single vector but the system-wide footprint and cross-links. The macroprudential toolkit for NBFIs is still catching up with their size and interconnectedness.
In the US, BDCs are watched as early-warning indicators for private credit because portfolio transparency into underlying borrowers is limited even though headline leverage caps are conservative. Recent credit events widened BDC senior spreads before retracing, illustrating the “fear of the unknown” channel when opacity meets headlines.
None of the headlines are so far away for an imminent systemic break, but they raise the bar for risk monitoring. If stress surfaces, term senior funding awards typically gap wider first, and liquidity preference rotates towards HQLA and secured formats . This mix can re-price cross-financial curves non-linearly. The narrative risk alone is a volatility catalyst across bank capital stacks.
Why it matters for covered bond spreads : investor behavior under NBFI-led risk-off first widens senior unsecured, then re-prices secured curves based on perceived collateral strength and repo value. Covered bonds' dual recourse and regulatory preference cushion the move, but sector Beta is not zero. In past stress events, CBs tightened vs. seniors yet cheapened vs. swaps as rates hedging and ASW macro-factors dominated. This relative-value triangle (CBs vs. seniors vs. SSAs) can shift quickly if funding curves migrate towards secured funding instruments. ALM demand absorbs some pressure, but primary NIPs and secondaries will still reflect a higher liquidity premium. Consequently, NBFI headline volatility is a spread-direction risk through funding channels, not credit impairment.
Primary Market Overview
EUR benchmark covered issuance has been consistently absorbed in 2025, with monthly prints ranging roughly from the low-teens to mid-twenties billions . Orderbooks remain deep for core names, and two-way secondary liquidity underpins steady follow-through. This cross-market backdrop keeps CB primary concessions disciplined. The front-to-belly remains the clearing point for most issuers. We still see the belly as the sweet spot for execution in 2026 and long tenors will remain selective unless relative value vs. SSAs re-balances.
Sub-7Y tenors have dominated 2025 YtD as issuers monetized carry/roll in the belly and avoided long-end crowding from SSAs/EGBs. 10Y+ EUR covered deals were less frequent after the late-summer volatility, and where they printed, performance has been flatter. New-issue premiums largely went missing again, guidance-to-reoffer compression hovered around 5–6bp, and coverage settled near 2.2x with October books still ~3x on average.
The tenor skew towards ≤7Y reflects both investor preference and issuers' funding economics vs. SSAs at the long end. Execution windows have however been broad enough to accommodate core and higher-Beta names.
The investor base has returned to a pre-CBPP3 mix, with bank treasuries still providing c.40–45% of orders, but with real-money participation rising since late-2023 . Asset managers have taken a larger share in 2025 YtD, particularly for longer tenors and higher-spread segments, while central banks/officials reverted to ~15–20% after QE peaks. Insurance/pensions have nudged up given all-in yields. There is also a pronounced domestic bias now that the ECB is out of primary, notably in Germany, France and Canada. Regional participation from UK and Asian accounts has increased, supporting book depth. The upshot is a more balanced, less QE-dependent buyer mix, which helps sustain tight secondaries when primary remains disciplined.
Supply Outlook 2026
We look for a moderate step-up in 2026 CB supply vs. 2025 at EUR173bn, but not a surge . Our estimate is driven by redemptions, bank funding mix and cross-currency windows. Below-average redemptions in some core systems blunt the mechanical lift from maturities, thus tempering gross prints.
Germany looks generally stable vs. 2025 , while Austria rises on higher redemptions and a wider active issuer base. France is stable to slightly down, as banks can fund cheaply elsewhere and continue to use retained issuance, and 8Y+ looks expensive for issuers. The Netherlands should print moderately more despite low L/D ratios , helped by a RABOBK comeback, while Belgium is steady. Norway rises as loan growth gaps deposits and NOK depth is insufficient to absorb needs , with Sweden, Finland and Denmark essentially stable. The UK is up as TFSME refinancing continues and covered redemptions multiply into 2026–27 .
Across the periphery and CEE, we expect Portugal to remain stable and Greece opportunistic only if pricing and mortgage production justify regular issuance. Spanish covered bonds recent return to triple-A at the program level is supportive for spreads but does not by itself create public supply given liquidity surpluses and retained usage. In Italy , redemptions are skewed to names that have been absent from primary, and loan growth is only gradually converging to deposits, hence a measured public calendar. In CEE , 2025 was a step-up year with Slovakia leading in EUR benchmarks; for 2026 we see roughly stable volumes with domestic currencies still dominant in CZ/HU and with the EUR used selectively. Poland's long-term funding ratio from 2027 could become a structural tailwind to covered issuance as banks adjust funding stacks.
Regarding Canada, we pencil in ~ EUR17bn of EUR benchmarks for 2026 against EUR24.3bn of EUR redemptions, with no one-for-one refinancing expected as deposits keep growing and the housing market only modestly recovers. This calculation is shaped by a diversified currency mix – Canadian banks printed in EUR, GBP, USD, CHF, CAD, AUD, NOK in 2025 – and by strong senior unsecured issuance since 2023 that can cannibalize covered needs. The bottom line is that Canadian EUR CBs likely rise modestly YoY but remain below 2023 peaks , with the largest names ( TD, RY ) expected to be more active. In hard currency, 2026 GBP redemptions of GBP9.4bn and USD redemptions of USD14.4bn provide optionality, and the GBP has tested flat/attractive vs. EUR since the PRA removed the Level-2A “modification by consent” uncertainty for non-UK holdings, with the GBP particularly viable for Canadian banks.
Australia: EUR supply emerged to ~EUR8.9bn YtD in 2025 and we expect ~EUR8bn in 2026, with lower CB redemptions in 2026–27 vs. 2025 easing the pressure. Market conditions and relative value favored seniors through 2025, and with tight senior–covered differentials , treasuries may prefer to save CB capacity and run unsecured when economical. Nonetheless, Australian banks have ample collateral and covered is cheaper funding at the right points, so selective public CBs remain likely.
In Singapore and KR , our guidance is EUR3bn apiece in 2026, as issuer counts rise to five (SG) and four (KR), extending the 2025 broadening of the non-EEA cohort. The growth is not just cyclical; both systems benefit from central-bank repo frameworks that recognize covered bonds.
The slight uplift in our supply profile reflects recovering mortgage markets in several systems, slimmer net liquidity surpluses, and higher YoY redemptions . Easing cycles have supported a measured rebound in household mortgage demand in Norway, Sweden, Canada, Australia and the UK, while deposit growth remains elevated and loan-to-deposit ratios sit below long-run norms. As a result, wholesale needs re-emerge but stay disciplined relative to prior cycles. We also factor in higher retained issuance for term-repo and continued non-EEA diversification across currencies, which can redirect flow away from EUR at the margin
In non-EUR currencies, we expect a meaningful pickup anchored by redemptions and cross-currency economics. In GBP , we pencil in ~GBP18bn of supply for 2026, dominated by UK banks but with continued prints from Canada, Australia and Singapore, against redemptions of GBP19.4bn (vs. GBP12.6bn in 2025). The TFSME roll-off profile and the re-engagement of UK lenders support this view, while Canadian GBP activity remains material.
In USD , 2026 redemptions rise to USD20.1bn (from USD15.4bn in 2025), and assuming an improved basis we expect about USD13bn of supply. The redemptions mix is led by Canada, with contributions from Australia, the UK and Germany. Non-EEA G10 issuers will continue to arbitrate across EUR/GBP/USD depending on RV and basis, smoothing EUR calendars when spreads or NICs are less friendly. These currency valves are a core part of why we see an orderly primary heading into 2026.
Secondary Market Perspective: CBs: Rates or Credit?
Covered bond spreads tightened materially in 2025 YtD , the strongest performance since at least 2019, with the iBoxx EUR Covered index about 13.5bp tighter since January , before drifting largely sideways through September–October after a strong July–August rally. Execution discipline reinforced the move: NIPs turned mostly negative , coverage rose back to ~ 2.2x , and guidance-to-reoffer compression hovered around 5–6bp , leaving reoffer levels resilient. The technical set-up stayed benign as 10Y Bunds held near ~2.7%, swap spreads didn't misbehave , and SSA prints remained firm – conditions that kept secondaries stable. France was the notable exception, as political noise pushed +3.5bp in September, yet French CBs still sat ~12bp tighter YtD into October. Higher-Beta jurisdictions led the rally, while Germany was the best performer outside the periphery and Slovakia ; dispersion compressed meaningfully across pads. Crucially, the old ~20bp “Anglo-Saxon vs. Germany” gap of 2023 shrank to roughly ~10bp irrespective of tenor, and CEE–core differentials also tightened.
The tenor pattern was equally clear: the front-to-belly rallied more than the long end , steepening curves and leaving 10Y+ still wider than a year ago despite the YtD grind tighter. Within cores, CRE-linked names were stand-out improvers, eroding the historical differentials to seasoned German peers, while periphery and Slovakia topped the league tables in relative performance. Secondary resilience fed directly from primary discipline – negative or de-minimis PINs, strong books, and fast post-allocation follow-through.
Relative value vs. SSAs also helped belly CBs: in 5Y Germany, covered often traded at slight pick-ups to KfW/NRW while 10Y differentials stayed range-bound, keeping bank treasuries engaged without stretching duration budgets. The key takeaways are tighter cross-jurisdiction spreads, concentration of liquidity in on-the-run deals in the belly, and selective appetite for longer tenors only when pricing is compelling. Barring a macro shock, this orderly secondary is set to carry on into 2026 as the starting point for valuation and window management.
Credit investors are re-engaging with covered bonds as a low-Beta alternative while acknowledging that some long-standing accounts trimmed exposure into the tightness of 2Q–3Q; with seniors and broader credit tight, the marginal bid for high-quality carry has grown. Portfolio managers continue to concentrate risk in the shorter end and wider sectors , judging CBs expensive vs. SSAs beyond 7Y but cheap to senior preferred in the front-to-belly, which keeps the curve's sweet spot anchored around 3–7Y. The consensus is that the phase for large, index-level re-tightening has passed; for a new leg tighter, investors would need a risk-off with Bunds rallying vs. swaps , allowing SSAs to compress first and giving core CBs room to follow. Iberian CBs are viewed as “fully priced” after scarcity-driven compression towards core levels, while Italy still screens appealing in 5Y (around BTPS flat and ~20bp over Germans) even as French CBs challenge OBGs at the long end on liquidity grounds.
Our recommended positioning would be : 3–5Y for carry/roll with limited ASW Beta; 5–7And as the sweet spot where PINs are still monetizable; selective beyond 10Y. Investors continue to favor shorter risk and wider sectors, reflecting balance-sheet usage and LCR optimization. Above 7Y, covered bonds look rich to SSAs on a capital/liquidity-adjusted basis, limiting appetite unless the pricing is compelling. As a result, primary windows cluster around belly tenors and on-the-run benchmarks . We expect this pattern to persist into early 2026. The expected net supply of c.EUR15bn in 2026 (and still below EUR50bn if we add CBPP3 redemptions to this tally) remains manageable for spreads.
Are CBs Tight or Wide vs. Our Model?
Our explanatory regression indicates covered bonds screen moderately tight at the index level after the summer grind tighter, with residuals persistently below the model-implied fair value. The model uses weekly moving-averages since 2021, when supply normalized and CBPP3 interference faded, and includes six load-bearing drivers: KfW 5Y ASW as an SSA proxy, 5Y senior-financial CDS (iTraxx), the EUR 5Y 6M forward swap rate, the 10Y OAT–Bund spread, US CMBS AAA OAS, and net adjusted supply (gross minus redemptions, adjusted for CBPP3 maturities). In this construct, spreads have little room to compress further absent a fresh rally in Bund-swap/SSA or a loosening in senior-financial risk awards. Conversely, a re-widening in these inputs would pull our model to wider spreads. Right now, the model points to range-bound trading with carry-and-roll doing most of the work. The fit vs. the iBoxx covered bond index is high, and the recent run of negative residuals is consistent with “somewhat tight” rather than “extremely rich,” a nuance that matters for sizing concessions and tenor risk in primary.
Cross-sections highlight dispersion: Germany screens tight to the model after ASW compression, while France screens close to fair value, and southern Europe looks tightest. The 4Q24 Bund-swap tightening was a headwind for CB swap spreads and helped cap upside in the most ASW-sensitive cohorts. Looking ahead, further German ASW tightening from higher net borrowing, excess-liquidity drain and cheaper repo should keep Pfandbriefe relatively rich vs. SSAs, limiting their capacity to lead to broad re-tightening .
Our predictive model SARIMAX(0,1,1)×(1,1,0,12) with monthly data (Jan-2015 to Sept-2025) and KfW 5Y ASW as the sole exogenous regressor – projects moderately wider iBoxx covered ASWs in 1Q26, before a gentle normalization into mid-2026. Put together, our two models, the regression and the predictive ones, are broadly aligned : the cross-sectional regression indicates “somewhat tight, range-bound unless SSAs/seniors move,” while SARIMAX points to “a modest 1Q26 widening, then sideways-to-stable,” ie, no regime shift.
Monitoring Bund–Swap, Repo & HQLA Mix
We see a structural tilt to Bund–swap tightening in 2026 , based on four drivers. First, Germany has shifted from a low-borrowing standout to a low-growth, higher-borrowing sovereign, raising cash supply relative to swaps. Second, core–periphery distinctions have blurred as NGEU and broader integration reduces the unique safe-haven premium on Bunds. Third, the market has moved from collateral scarcity to collateral abundance, with a rising free float that must be absorbed by price-sensitive investors. Fourth, repo rates are set to cheapen as excess liquidity drains, pressuring ASWs tighter. These forces interact differently across Schatz, Bobl, Bund and Buxl, but the underlying theme remains cash cheapening vs. swaps. In our base case, repo cheapening continues as reserves glide toward the MRO anchor, reinforcing the ASW-narrowing bias. When ASW cheapens, products priced off swaps (CBs, SSAs) must re-balance via relative-value channels.
Contextually, Bund–swap has already retraced from the 2022–23 wides into negative territory around –5bp in 10Y, removing some “anchoring” for CB valuations vs. swaps. This tightening phase was a headwind for CB swap spreads and explains the more range-bound behavior in 2025. Our analysis argues that the 2026 path remains skewed to further tightening as German net borrowing rises (~ EUR170bn total; ~ EUR140bn Bunds) and QT persists (~ EUR80bn ), with repo gradually cheapening as excess liquidity falls. In that regime, belly CBs/SSAs should out-carry outright EGB ASW longs, given lower ASW Beta and more manageable supply calendars. The empirical link between Bund-ASW and CB ASW is strong but varies over time.
Mechanically, the repo market is the clearing price for collateral demand and supply, and post-pandemic dynamics have pressed on the cash-vs.-swaps trade. As excess reserves recede, tri-party activity and term repos have grown, gradually normalizing GC levels versus ESTR/Euribor.
Retained covered bonds have become the fulcrum of the post-TLTRO liquidity toolkit and will continue to form public issuance . As QT and TLTRO repayments drained reserves, treasuries scaled retained issuance to pre-position collateral they can term out in private and central-bank repos, typically at 6–24 months to optimize NSFR and LCR. The share of covered bonds posted at the ECB more than halved from 44% in 2H21 to ~21% in 2Q24 before stabilizing near ~25% in 2H24, with c.EUR400bn still posted – evidence of sizeable collateral stock that can be redeemed or re-used if public funding is attractive.
Retained covered bond activity has been broad-based across NL/DE/FR/IT , and more than half of 2024 & 2025 retained volume printed at ≥10Y, showing a structural, not just cyclical, trend. Importantly, taking back retained bonds only creates public refinancing needs if they were term-funded; Otherwise, they are canceled or re-used, limiting their direct impact on benchmark volumes. Tri-party data also show covered bonds becoming the second-largest collateral class post-TLTRO unwind, even as shares ebb and flow. All in, retained dynamics vary by country but share the same driver: conversion of balance-sheet quality into funding optionality, which in turn helps smooth public covered-bond supply and spreads.
European banks' HQLA mix has rotated materially since 2022, and this rotation matters for CB demand and spreads. The share of cash and reserves in HQLA has failed to multi-year lows as treasuries replaced ECB deposits with bonds when valuations vs. swaps widened. EGBs' share in HQLA rose from roughly 20% to 30% (about ~EUR700bn more), with the shift most striking in Italy, Greece and Portugal, while Germany and the Nordics focused relatively more on SSAs and covered bonds. Average LCRs remain elevated around ~160%, but the composition of buffers—Level-1 sovereigns vs. Level-1/2A/2B credit—is relevant for relative valuations. This evolving HQLA/collateral mix is supportive for highly liquid, belly-tenor CBs with favorable repo treatment, anchoring a spread floor.
Why it matters for covered bond spreads : a) impact of 10Y Bund-swap spread dynamics on both SSAs and covered bonds, with the former being impacted by repo cheapening as excess liquidity drains; b) repo mechanisms amplify the collateral scarcity (covered bonds) vs collateral overabundance (EGBs) dynamics, with covered bonds becoming the second-largest tri-party collateral class post-TLTRO unwind, with volumes at all-time highs driving high issuance activity in self-retained covered bonds, c) the evolution of the HQLA mix, with European banks rotating from cash toward EGBs—EGB share rising from ~20% to ~30% (~€700bn)—and Germany/Nordics' heavier use of SSAs/covereds shape a steady belly-tenor bid.
Spotlight on France
French CBs have re-established RV vs. peers after repricing on macro-political noise and now trade inside OATs beyond ~7Y . The 10Y point sits about ~20bp inside OATs, driven by strong structural buffers, low spread beta and international sponsorship. Domestic participation fell when CBs crossed within OATs, but Nordic and DACH/Benelux credit accounts filled the gap. Program specifics also matter : CAFFIL shows pick-up to ACACB at 10Y, reflecting cover-pool composition and perceived public-sector linkage. Rating leeway remains ample, and sovereign ceilings are not binding for France. Mortgage-backed lines have a stronger bid when public-sector risk is topical. Expect CBs to trade with growing independence from OATs if sovereign noise persists.
If the sovereign were downgraded further, relative advantages could widen for CBs vs. French SSAs, especially for agencies moving to higher risk-weight buckets under CRR3 . Regulatory treatment for many agencies follows the second-best rating, increasing the chance of RW step-ups and LCR setbacks. This would likely decompress SSAs vs. CBs by ~10–15bp in risk-off episodes. In contrast, CB frameworks preserve AAA stability even through several notches of sovereign stress. The result is a more durable bid for French CBs in belly tenors, with secondary resilience.
Third-Country Equivalence & non-EEA CBs
As of now, non-EEA CBs are treated worse than EEA peers for European banks' ALMs : 20% RW under the standardized approach, LCR Level-2A (not Level-1), and—critically—no ECB repo eligibility outside the G10 cohort. That raises capital and funding costs by roughly ~10bp plus 3–5bp for missing repo, before haircut effects. consequently, belly EUR prints from CA/UK/AU typically price at a pickup vs. Pfandbriefe.
The EU could potentially explore a third-country equivalence regime anchored in the CBD, potentially aligning risk weights and liquidity treatment. If enacted, some third-country CBs could be treated as “European Covered Bond (Premium)” for CRR purposes. This would lower capital charges and improve LCR status, and it would be materially spread-relevant for select issuers, but the timing of such a decision remains unclear.
According to the EBA report, third-country equivalence would require three ingredients : fundamental legal features and supervision comparable to the EU, demonstrated maturity of the domestic CB market, and reciprocity commitments. The EBA also proposes assessing against CBD principles and, for CRR benefits, Art.129 compliance—either via a supervisory list or investor legal opinions. The UK likely sits in pole position to reach reciprocity earliest, with 2027 a plausible - but not guaranteed - start date . The Commission will ultimately decide, and timelines are uncertain given broader legislative priorities. Even so, signaling alone can begin to reshape bank-treasury RV frameworks, which would narrow historical differentials attributable to repo and capital and issuer behavior would adjust accordingly.
Until then, the status quo holds : Level-2A, higher RWs, and non-G10 repo exclusion at the ECB continue to tax non-EEA valuations in EUR. Banks will keep favoring ECB-repo-eligible third-country names (eg, Canada, the UK) over non-G10 in the primary. Should ECB repo rules broaden, we estimate 3–5bp of compression where eligibility changes, with investor mix shifting more towards bank treasuries. The EBA report is the first credible step toward such changes, but implementation remains an EC choice. Meanwhile, comparative frameworks across CA/UK/AU/NZ/SG already meet many CBD-like features. Closing the remaining gaps would eventually converge.