Liquid gold?

An appearance of liquidity has been vital to the development of the covered bond market. But the events of last summer have called into question the systems that underpin its operation. Richard Kemmish of Credit Suisse looks at the forces at work and asks which school of thought will emerge victorious

Covered bonds have long been marketed as a 'rates' rather than a 'credit' product. It's a distinction that issuers and investors alike have historically taken at face value. But, as with so much of the market's received wisdom, the events of last summer have forced a reconsideration. Firstly, what does this distinction actually mean?

On the broadest level there is a consensus that a rates product is a (credit) risk-free, fixed rate bond with high levels of liquidity that can be traded as a proxy