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Capital Markets

Covered bonds invade new markets

Covered bonds are moving out of their traditional heartlands of France and Germany and becoming a global product.

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FOR A PRODUCT that is nearly 250 years old and originated in the gloomy surroundings of east Prussia, covered bonds have enjoyed a remarkably vibrant year. New, national species of what was once thought of as a dowdy and homogeneous product proliferated in 2003.

Covered bonds made their debut in Austria, Ireland, and the UK. Spain had its first public-sector loan-backed issue. Germany, where Pfandbrief issuance is still colossal, is changing its mortgage bank legislation to invigorate the market in 2004. Belgium, Lithuania, Portugal and Sweden are all reportedly looking at introducing their own covered bond laws.

Italy, which got rid of its covered bond legislation in the 1980s, now wants to reintroduce a covered bond law.

"Covered bonds are moving from being a French and German product to a global product. They're approaching US agency volumes and could exceed them," says Ted Lord, who is responsible for developing Barclays Capital's European covered bond business. Looking forward, there is plenty of room for expansion beyond western Europe. "We're seeing deals in central and eastern Europe, and in Australia," says Lord. "And if the Russians get hold of this product, it will have hit potentially the largest mortgage market in Europe."

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