Covered Bond liquidity treatment update

As mentioned last week, lobbying by the covered bond market driven by Denmark was beginning to make progress. It now appears their efforts have worked, at least in part. Denmark's economic ministry have announced that banks will be allowed to hold up to 70% of their liquidity buffers in covered bonds at 93% of their market value. This is a big step up from the original 40% and 85% of market value in the current plan. There will be additional criteria for individual transactions such as deal size and credit rating that will have to be met in order to qualify for the improved ranking but these are expected to be relatively benign.

These new rules are still to be approved by the European Commission. Assuming a smooth path to approval, this development is a shot in the arm to the Covered Bond market and removes a significant hurdle to the further development and growth of the sector.

T. Rowe Price Launches Credit Opportunities Fund

As the hunt for yield continues, more and more investors are looking toward the more esoteric side of credit markets. Yesterday, T. Rowe Price announced the launch of a credit opportunities fund that will have a wide mandate to invest in the more esoteric side of fixed income markets.

http://www.prnewswire.com/news-releases/t-rowe-price-launches-credit-opportunities-fund-for-investors-seeking-appreciation-and-income-258291771.html

Battle for Covered Bond liquidity treatment steps up

Covered Bond issuers and investors will soon have clarity on just how European regulators will treat their bonds in relation to liquidity ratios in the future. Under Basel III, banks are required to hold liquidity buffers in assets made up of at least 60% of "Type 1" 0% risk weighted government securities and a max of 40% of "Type 2" AA- rated 20% risk weighted securities that includes covered bonds.

The covered bond market has been pushing for their bonds to be included in the Type 1 bucket for some time with little success but discussions seem to have intensified in recent weeks amid some hope that some form of compromise can be reached.

The outcome of discussions with regulators will have profound effects on both the future size of the covered bond markets and the profitability of European banks under Basel III. Keeping covered bonds as part of the Type 2 group of assets will reduce demand from investors, driving yields higher and reducing issuance. Moving covered bonds into the Type 1 category will potentially drive significant issuance from issuers as banks increase their holdings in covered bonds as opposed to sovereign debt in order to maximise returns on their liquidity buffers. A full update of the story can be seen here 

http://www.bloomberg.com/news/2014-05-06/eu-covered-bond-talks-intensify-as-bank-liquidity-rules-in-play.html