Unclear rates, tight spreads muddy covered outlook

Tough Mudder
By Bill Thornhill
27 Jan 2021

Covered bond spreads are so tight that asset managers with strict mandates to invest only in this asset class, such as Union Investment in Germany, have limited room to extract relative value and post a better performance than the main indices. And unlike last year, when falling interest rates boosted absolute returns, the rates outlook is less certain.

The iBoxx Euro Covered Bond Index delivered a total return of 1.9% in 2020, largely because rates fell after March’s sharp spike. In contrast to bank investors — which only need to earn a yield above the European Central Bank’s minus 0.5% deposit rate to buy covered bonds ...

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