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FIGCovered Bonds

Covered bonds: a buy-side perspective of the sovereign crisis

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The Cover brought together a group of central bankers, portfolio managers and investment bankers to discuss the covered bond market in the context of the sovereign debt crisis last month. Despite a fundamental belief in the soundness of the covered bond product, the roundtable participants warned of the dangers of the inextricable link between a sovereign entity, the issuers within its jurisdiction and their covered bond programmes.

Credit ratings have provided the transmission mechanism that effectively links the sovereign rating to the covered bond rating. As sovereign downgrades have filtered down to covered bond programmes, many issuers in Europe’s periphery have been shut out of the publicly syndicated covered bond market.

Though UniCredit showed it is possible to sell a covered bond rated below the material regulatory rating threshold of AA-, and at funding levels much cheaper than its own government, it will be a difficult act to follow.

Thanks to the intervention of the European Central Bank, which flooded the market with its long term refinancing operations, there has been no big bank insolvency. However, this wave of liquidity has starved cash-rich investors of choice and funnelled their extensive demand into a confined selection of highly rated and generally more liquid covered bonds from issuers in core Europe and outside.

This concentration of demand has caused spreads in these regions to tighten sharply, a situation exacerbated by negative German government bond yields.

But this technical bid is increasingly difficult to justify from a fundamental standpoint and, though a correction is overdue, the timing of such an event is almost impossible to predict. Investors have therefore tried wherever possible to diversify away from Europe and the euro.

Participants in this roundtable are:

Florian Eichert, head of covered bond research, Crédit Agricole CIB

Christian Haller, head of financial institution origination, Crédit Agricole CIB

Vincent Hoarau, head of financial institutions, covered bond and ABS syndicate,

Crédit Agricole CIB

Daniel James, global markets alpha portfolio management, Aviva Investors

Bence Lanyi, euro credit portfolio manager, Magyar Nemzeti Bank

Philippe Mongars, deputy director, Banque de France

Nicolas Poli, head of supra-agencies trading, Crédit Agricole CIB

Juan Pablo Soriano, director general, Moody’s

Mark Stacey, portfolio manager, BlueBay

Jean-Erik de Zagon, head of portfolio management division, European Investment Bank

Bill Thornhill, editor, The Cover


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