Since the depths of the crisis, as some semblance of normality has returned to financial markets, covered bonds have regained their status as the poster child of a low-risk investment strategy. And its appeal has even broadened in recent years: some hedge funds looked at the market for the first time during the crisis, and, while few are still active buyers, a greater number of pension funds and insurance companies invest than ever before.
Countries with established covered bonds markets – Germany, France, the Nordics – have seen them returned to their former pre-eminence, relative to other local asset classes, with attitudes to risk still cautious. Even the likes of Spain and Portugal, currently being rocked by sovereign debt concerns, have seen activity this year, although they have fallen victim to the increasing differentiation between credits, after the heady, pre-crisis days.
The US has been watching this general development with interest. Before the crisis took hold, it had been channelling significant energy into efforts to establish its own covered bond market. Those efforts were put on hold when the crisis was at its nadir: with so much attention being paid on keeping financial markets afloat, there was little left over for establishing a new asset class, even if it was considered to have some remedial qualities.
Now some in the US have turned their attention squarely onto the benefits a covered bond market could have for its economy generally. It would be a boon for a still-sickly real estate sector, helping to alleviate some of the pressure building up in mortgage financing; it would give banks another welcome source of capital; and it would play to the interest that US investors have already shown in the product – interest that has been identified and exploited by European and Canadian banks but which remains tentative until the industry is enshrined in US law.
The US is by no means the only country looking at establishing a legal framework for covered bonds, although it is by far the biggest of the new players. France, one of the oldest and most prestigious markets for the asset class, has also been looking at its legislation in an effort to streamline what is already a popular and successful sector.
Its efforts are not expected to make a big difference in terms of issuance levels: unlike US investors, the French have not been shy about investing in securities where there are some legal question marks. But there is a feeling that in order to compete with their even more prestigious German neighbours, the French needed to create a more coherent framework. The changes are expected to be unveiled within months.