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Covered bonds: An alternative to corporates

Covered bonds: Picking up tacks in front of the steamroller

If covered bonds have been appealing to investors unable to find yield in the sovereign and supranational sectors, bankers report that they have also been attracting investors from elsewhere in the credit world. "A feature of the order books for some of the very large recent deals is that we have seen investors moving out of corporate issues that have tightened significantly and into covered bonds," says one banker.

Schroders is one investment manager providing an example of that process. Lucette Yvernault, portfolio manager at Schroders in London, says that while the firm has no dedicated covered bond mandates, the asset class has played an increasingly important role in a number of its government bond and credit portfolios. She says that in spite of the strength of the market’s performance this year, Schroders continues to see compelling relative value in certain areas of the covered bond market.

"Since the summer we have been adding covered bonds to our portfolios even though the market has rallied very strongly," Yvernault says. "Why? Because many of the corporate credits that are trading in a range of between mid-swaps flat and plus 50bp now have access to very cheap financing and, like Kraft, are potentially looking to expand through acquisition.

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