12 MARKET VIEW
Safe and sound
European covered bonds could be a good fit for investors looking for safety. They are a true alternative to traditional government bonds. But the asset class has other, equally attractive qualities.
After years of low yields, followed by a dra- matic drop in prices during 2022, returns in the fixed income markets are finally poised to rebound. It's likely to be a bumpy ride due to the cross currents created by global central banks' tightening policies, a volatile global economy, and ongoing political uncertainty both within and outside of Europe. That said, we believe current market dynamics have created a particularly attractive opportunity in covered bonds as an alternative to government bonds in Europe. Recent events in the banking sector, triggered by the failure of Silicon Valley Bank, have led to questions about the safety of financial debt, and an inevitable widening of associated spreads. European covered bonds were not immune, given that they are issued by financial institutions. The impact could last be seen in March this year, when market concerns around Credit Suisse re- sulted in a spread widening of around 20bps be- tween European government and covered bonds from trough to peak. “Historically this kind of con- tagion effect has opened up attractive opportuni- ties for investors to deploy capital into the asset
class,” says Henrik Stille, portfolio manager of the Nordea 1 – European Covered Bond Fund . “In addition, there are also supply dynamics at play in the rates market that are likely to be construc- tive for European covered bonds as an attractive alternative to sovereign debt.” In his opinion, a key part of the foundations to both these points is an understanding of the safety level that covered bonds can offer to investors. The double safety of covered bonds “One of the primary advantages of investing in European covered bonds is their high credit qual-
At a glance
` Recent events in the banking sector have led to a widening of financial debt spreads, including covered bonds ` At the same time, supply dynamics in the market mean that now is an extremely attractive time for investors in European covered bonds over government bonds
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