New faces on both sides of the table
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The new faces in the market have not only been on the issuer side. Covered bonds have attracted a range of new investors, too, with rates investors, for example, flocking to covered bonds as they shun peripheral sovereign debt.
There is also evidence that central banks are investing more in covered bonds in the three to five-year part of the curve. “Credit investors are coming to the asset class because they are concerned about bail-in discussions that could see them bear losses on other forms of bank debt,” said Grossman. “Rates investors prefer a bank’s covered bonds as a higher-yielding alternative to the sovereign debt where the bank is domiciled.”
Insurance companies are embracing the asset class because the spreads on offer look very attractive relative to other fixed income sectors after accounting for the different capital charges which comes into force from 2013. “In the approach to Solvency II we are seeing insurers re-allocate from corporate and financial unsecured bonds into covered bonds,” said Porter.
Bankers also believe covered bonds are increasingly attractive to credit investors, with politicians calling for losses to be forced onto bondholders in future bail-outs. Germany passed a law in November that will force bondholders to take losses if a bank fails – but this does not include covered bonds.