A Primer on Global Covered Bonds: A rates-driven asset class with a credit touch
Our Global Covered Bonds Primer provides a comprehensive guide to the fundamentals and key features of an asset class that has now made a full comeback to its rightful place in the asset allocation process of investors – after many years outside their radar due to the purchase programmes of the ECB (CBPP3), tight spreads and unattractive all-in yields.
The global footprint of the covered bond market, along with the rise in new jurisdictions issuing covered bonds, has created a complex environment for investors to navigate. Although the EU Covered Bond Directive (EU) 2019/2162 has established minimum standards for covered bonds without compromising the quality features of the product, some differences remain.
We give an overview of the evolution and globalisation of the market, main statistics, key drivers, structural and legal features, spread dynamics vs EGBs/SSAs and credit (senior preferred), along with an overview of the regulatory frameworks of the main covered bonds, the role of central banks and particularly the ECB as a key anchor investor, index eligibility, and maturity structures and rating methodologies.
In our comprehensive guide to the fundamentals and key features of covered bonds, we look at the following key topics:
- The main features of covered bonds, the evolution of the market size, the main buyers of covered bonds and issuance trends.
- Sustainability and covered bonds: main types of ESG-labelled covered bonds and their pros vs their conventional peers, future growth prospects.
- Key legal features, drivers, and issuance structures.
- Regulatory treatment (CRR, EU Covered Bond Directive, Solvency II, LCR, central bank repo eligibility).
- The secondary market dynamics: covered bonds and their variable relationship with the rates and credit markets, the Bund-swap spread and fundamental risks.
- The role of central banks and particularly the ECB as key anchor investors in the asset class.
- The evolution of covered bond frameworks in both EEA and non-EEA countries, looking at the key criteria with respect to who is the issuer, the issuance structure, eligible assets, how LTV limits are calculated, extendable maturity triggers, covered bond issuance limits and ECB repo-eligibility.
- Index eligibility rules, covered bond maturity structures and rating methodologies.