US banks pay for covered charge
At the recent Euromoney US Covered Bond Conference in New York there was a clear sense of excitement among investors, bankers and market commentators about the future of covered bonds. What used to be principally a German backwater has become, over the past decade, the biggest, most liquid and highest-rated part of the non-sovereign bond market in Europe. New markets and new segments of existing ones are opening all the time. Recently established markets are maturing, and older markets are updating themselves. It is finally becoming truly global, with investors in Asia, and especially in the US, starting to acknowledge the virtues of covered bonds.
Since the first US domestic covered bond issue, from Washington Mutual, in September, interest in the product among US investors has been increasing. "There has been an overnight change in the US covered bond market," says Derry Hubbard, head of covered bonds at BNP Paribas. "European covered bond issuers have long been trying to deepen penetration into the US investor base."
Stumbling blocks
However, one group that was notably undersubscribed at the conference were the issuers themselves. The potential for domestic, dollar-denominated issuance is huge, as the US mortgage market is so much larger than equivalent European markets.