New York's financial markets are looking east for inspiration, and they've found it in the covered bond market. Investors like this product because it represents a way to invest in triple-A-rated or close to risk-free assets at attractive spread levels. Market sources say the benefits are clear for issuers: It is a source of diversification of financing.

Washington Mutual's $25.6 billion transaction, secured by 5/1 hybrid ARM mortgages, was the first covered bond transaction completed in the U.S. Since its close last September, student loans have been targeted as possible collateral for future U.S. covered bond deals. European countries are beginning to secure large percentages of covered bond securities with commercial mortgages, said Elizabeth Padova Hanson, a director of covered bond and revolving-structure ABS origination for ABN Amro, at a recent American Securitization Forum Sunset Seminar on the asset class.

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