GC: As GlobalCapital’s Covered Bond Investor of the Year, what sets your investment strategy apart from other investors in the market?
Stille: Nordea Asset Management is one of the largest players in the European covered bond market, managing around €40bn. Our fixed income rates team brings an average of 20 years’ experience and a 15-year history of collaboration. This continuity enables deep insight into the nuances of the market.
Our product range spans from classic long-only solutions to strategies with low or no interest rate risk, as well as absolute return approaches with varying risk budgets. Additionally, covered bonds serve as a key building block within many of our multi-asset solutions.
Despite their reputation as safe and highly regulated instruments, covered bonds are often viewed as static, leading many to default to passive strategies. That’s a mischaracterization. The market is structurally inefficient, from yield premiums offered by new issuers, to rating agency methodologies that don’t fully reflect the credit dynamics of specific institutions.
These inefficiencies create opportunities for skilled active managers. At Nordea, we focus on relative value across jurisdictions and structures, including outside the euro-denominated market, while fully hedging currency risk. Our ability to exploit ratings asymmetries and technical dislocations has allowed us to generate consistent alpha in this space.
GC: How do covered bonds compare with government bonds or corporate credit in the current environment?
Stille: For many sovereign issuers, credit quality has deteriorated in recent years, driven by large investments in defense and infrastructure amid relatively low growth. This has resulted in sizable budget deficits, higher debt-to-GDP ratios, and an enormous funding need in government bond markets. From a credit perspective, this makes covered bonds even more attractive relative to government bonds.
Meanwhile, the outlook for covered bond issuance — both net and gross supply — is declining, as loan demand from borrowers remains low and banks’ deposit bases remain stable or even grow. Corporate credit has performed strongly, with spreads versus covered bonds near historic lows.
They also enjoy unique regulatory protections. Under the EU’s Bank Recovery and Resolution Directive, covered bonds are exempt from bail-in measures, unlike unsecured bank debt. That makes them particularly attractive to regulated institutions seeking balance sheet resilience.
Volatility-wise, covered bonds offer a smoother ride than corporate credit. Spreads are responsive to sentiment, but far less reactive in stress scenarios. And compared to sovereigns of the same rating and tenor, they frequently offer a yield premium — enhancing long-term return potential without increasing credit risk. Taking the credit quality, supply dynamics and spread levels as a whole, we see the environment as particularly favorable for covered bonds.
GC: How have investors responded to the recent rate volatility, including the post-tariff announcement spike in US Treasuries?
Stille: When rates reprice sharply, even traditional safe havens like US Treasuries can feel exposed. Investors are forced into a choice between risk-aversion and lost return or staying exposed to assets that no longer feel secure.
In that context, covered bonds offer a compelling middle ground. While less familiar to investors outside Europe, they’ve existed for over two centuries with no defaults. Their dual-recourse structure — backed by both the issuing bank and an overcollateralized cover pool — adds a layer of protection unmatched in many other fixed income sectors.
GC: Are there inefficiencies or opportunities in the covered bond market that investors can take advantage of?
Stille: Absolutely. A classic example: you can sometimes find covered bonds trading at higher yields than government bonds from the same country — despite offering superior credit profiles. Italian covered bonds, for instance, may yield more than sovereign debt even though they benefit from dual recourse and often better ratings.
As an asset manager, we are not constrained by risk-weight factors, and our investment universe focuses on covered bonds within G10 currencies. Many relative value opportunities arise outside the Eurozone, where issuing banks often have even stronger credit quality. Their covered bonds are typically more attractively priced relative to local government bonds and the issuer’s senior debt.
GC: Let’s talk about the bigger picture. How do supply dynamics and central bank policy shape the outlook for covered bonds?
Stille: Right now, supply is actually contracting. Governments are issuing more debt to fund fiscal expansion, but banks are issuing fewer covered bonds due to slower mortgage origination in Europe. That declining supply, paired with strong investor demand for high-quality assets, creates a favorable technical environment.
At the same time, the ECB’s balance sheet unwind is disproportionately impacting sovereign bonds. Sovereign redemptions from the ECB’s portfolio are putting upward pressure on yields, while covered bond roll-off is more measured. This divergence reinforces covered bonds’ relative stability and attractiveness.
GC: Finally, what’s the strategic case for covered bonds in a global portfolio?
Stille: They should be seen as both a tactical and strategic allocation. In the short term, they provide a safe haven when even Treasuries feel shaky. Over the long term, they offer consistent yield advantages, diversification benefits, lower volatility and insulation from political or fiscal instability.
Covered bonds anchor portfolios with a level of safety comparable to sovereign debt, while quietly delivering value through spread and structural inefficiencies. In an environment defined by uncertainty, few assets offer such a compelling combination of resilience, liquidity, and return potential.