In a sure sign that covered bonds are coming into favor, the session devoted to the subject at ASF 2010 was standing room only. There was broad agreement among the panelists that for the market to take off there would have to be a legal framework, something that Rep. Scott Garrett (R-NJ) has been advocating for some time.
“[A market] could evolve without a legal framework but any kind of real, deep and liquid market, the kind we want, requires the legal certainty and public supervision of legislation,” said Scott Stengel, a partner at Orrick, Herrington & Sutcliffe.
He hopes that the comprehensive legislation as proposed by Garrett becomes part of the Senate’s regulatory reform bill being crafted by a panel headed by Senator Christopher J. Dodd (D-Conn.).
Other panelists likewise expressed cautious optimism over the outlook for a covered-bond framework, in part because it appears to have strong bi-partisan support. Unlike with much of ABS, the financial maelstrom of the last couple of years may have actually helped turn politicians in favor, as opposed to against, the expansion of this sector.
Spreads on covered bonds in Europe widened less than securitization deals during the crisis and even in the markets’ darkest months there was issuance, said Jens Tolckmitt, executive director of the Association of German Pfandbrief Banks. But the crisis still had lessons to teach investors of this product.
While the European covered-bond structure proved its worth during the crisis, its correlation with other asset classes was still higher than anticipated, said Wesley Phoa, senior vice president of buysiders The Capital Group Companies. He added that liquidity was also an issue. But should a developed bond market emerge in the U.S., Phoa said, “we’d be interested.”