Bond Outlook by bridport & cie, February 9 2011

How strange that most new bond issues are now for banks, and that most of them are covered bonds. These are not quite the same as asset-backed bonds as covered bonds are on the banks’ balance sheets. Nonetheless, there are signs that the securitisation of asset-backed loans is again coming to the forefront. Just as last week we suggested that in the USA the economy had returned to its pre-crisis characteristics of continually expanding indebtedness at all levels – which apparently rejoices American politicians and commentators – so the return of asset-backed bonds is also somewhat “back to the future”. This time, however, investors are a little more aware that they cannot really understand the solidity of the underlying assets (notably mortgages and car loans).

If banks in general are no longer issuing unsecured debt, the events in Ireland are causing further turbulence in the banking sector. The confusion created by the announcement of both the current Finance Minister and his likely replacement is two-fold:

• they are threatening a haircut on unguaranteed bank debt
• just what debt is guaranteed and what is not is unclear

Back in 2008 the Irish Government put senior bond holders on the same level as depositors and, by nationalising the troubled banks, transferred the burden of non-performing loans from bondholders to the Irish population as a whole.