Financial Times: CBs Among "Best Performing Asset Classes"

Britain's Financial Times (Feb. 24) proclaimed that covered bonds — "once an obscure form of bank funding" — have become "one of the best performing asset classes of the past year."

Issuance in 2010 of so-called "jumbo" covered bonds (i.e., at least €1 billion) has already reached the €30 billion mark (USD $40.661 billion), wrote Financial Times Capital Markets Correspondent David Oakley.  He noted that about 40% of that total was issued by French banks, with German banks coming in second at 15%.

Of course, there has been no issuance of covered bonds in the U.S. since pioneering launches in 2006 and 2007 came to a halt as the global economic crisis mounted.  But "U.S. investors are already looking more closely at this kind of financing, which will help to lubricate the mortgage and public debt markets and may pave the way for a stronger economic recovery."

The strongly positive tone of Oakley's article contrasts with some recent posts by Tracy Alloway on the Financial Times' blogging site, FT Alphaville, which have raised concerns about the possible negative effect on European covered bonds of "sovereign jitters" (especially in relation to Greece), as well as the ratings and countries of origin of some assets the cover pools of public-sector German Pfandbriefe (legislative covered bonds).

Covered bonds are debt obligations that have recourse to a pool of assets — the cover pool — that secures or "covers" the bond if the issuer becomes insolvent.  To date, they have primarily been used for real estate and public sector financing.