14 MARKET VIEW
Safety first: orange clownfish are among the safety-conscious inhabitants of the oceans, and for good reason. They have little to defend themselves against their predators. That is why they seek shelter among anemones, whose poisonous tentacles offer them protection.
Bank Recovery and Resolution Directive (BRRD), which exempts covered bonds from bail-in. A bail-in helps financial institutions on the brink of failure by requiring the cancellation of debts owed to creditors and depositors. “Bail-ins have been considered across the globe to help reduce the burden on taxpayers,” Stille states. “The ex- emption of covered bonds means that, in case of a defaulting bank, the BRRD excludes them from absorbing any losses via bail-in. Notably this is not the case for senior debt and other securities lower in the capital structure. With the regulatory backstop, this leaves covered bonds at a safe- ty level equal to insured deposits in your bank account. Currently, this includes any assets up to a value of EUR 100,000.” Opportunity knocks So why is now such an attractive time to be looking for exposure to covered bonds instead of government debt as a safe haven investment in Europe? “We already touched on the spread widening, which in itself is reason to consider an investment in this asset class,” Stille says. “Howev- er, there are also longer-term supply dynamics at play in the market that suggest European covered bonds will outperform European government bonds over time.” According to a Citigroup Inc. market report published in January this year, net supply of government bonds in the Eurozone was around EUR 100bn in 2022. The same report predicts this figure will increase four to five times during 2023 as governments in Europe issue debt to fund large current account deficits. At
the same time, the European Central Bank (ECB) has not only stopped its Quantitative Easing (QE) programme, but has also been actively pursuing Quantitative Tightening (QT) since 1 March. “This means the ECB will no longer be a buyer of all this new government debt,” Stille explains. “Thus, it will be up to private investors to pick up the slack.” In contrast, European covered bond issuance is expected to decline by 50% compared to the previous year. “This is because new mortgage activity in Europe is extremely low for the time being. So, issuance is only happening in cases where maturing bonds need to be replaced,” Stille argues. “With market dynamics as they are, it is difficult to imagine that spreads between Europe- an government and covered bonds shouldn’t, at a very minimum, tighten back to historical averages. We believe this makes the investment case for European covered bonds extremely compelling right now.”
Nordea 1 – European Covered Bond Fund
Henrik Stille
Manager
EUR
Base currency
LU0076315455 (BP-EUR) LU0539144625 (BI-EUR)
ISIN
05.07.1996 (BP-EUR) 09.12.2011 (BI-EUR)
Launch date
nordic friends
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