Covered bonds: It’s time to get picky, says UBS

Technicals will turn negative and valuations widen this quarter.

Fundamentals remain strong, but supply and demand patterns mean that investors should go underweight covered bonds compared with AAA sovereigns this year, according to UBS.

Although cash-rich investors will soak up this month’s estimated supply of about €17 billion, technicals will turn negative in February.

“After January 2006, new supply will outweigh demand from new money,” UBS said in its covered bond outlook for the year. As yields rise, cyclical demand will fall as investors become more price-sensitive and look for a risk premium from lower-rated issuers and structures.

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