Covered bonds retain favoured status in Europe, but investors watchful on collateral quality

Collateral damage

Haircuts under the ECB’s €60bn covered bond purchasing programme were 10% lower than for ABS

For a long time, covered bonds were viewed as the unglamorous, steady-Eddie of the bond markets, particularly when compared with their off-balance sheet cousin, securitisation. Issuance levels were solid and predictable from year to year, and because the assets underlying the transactions were generally high-quality residential mortgages, there was little in the way of complexity or innovation – prized commodities in the pre-crisis boom years – to get investors excited.

Yet if one asset class

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