Don’t worry. Stay covered.

For financial markets, 2022 began as a perfect storm. Geopolitical events, the return of high inflation and Central Bank actions triggered a significant sell-off. Both equity and bond returns have been hit hard. This situation is especially troubling for safety-oriented bond investors: even high quality segments of the market like government bonds faced massive headwinds. So where should investors seek coverage in the storm? Actively managed covered bond strategies can make the difference.

Covered bonds, which can be seen as an alternative to the very high grade government part of the market, were also knocked in this environment of rising yields and widening spreads. However, their credit quality has not been damaged at all. Banks’ balance sheets are still looking strong. Credit quality is supported further by EU regulation that excludes covered bonds from bail-in risks. The regulation draws a clear distinction between regular bank debt (higher risk) and covered bonds (lower risk). This is a strong foundation for covered bonds to continue their track record of more than 200 years of no defaults.

In these rocky market conditions, active management made a big difference. Much of the market is taken by passive players, leading to more opportunities for alpha-creation than are usually to be found in so-called lower-risk asset classes. Nordea Asset Management has been running European Covered Bond strategies since 2012 with a very strong and distinctive active approach. This worked very well in the years up to 2022 – and it is still working during the current environment. One of our flexible solutions, the Nordea European Covered Bond Opportunities Strategy, has delivered a positive absolute return to investors year to date (26.08.2022)1.

The European Covered Bond market is a unique fixed income market – and our approach to this market is a unique strategic value proposition. Our position as the largest covered bond manager in Europe2, with around EUR 45bn in this asset class, endorses this view.

Visit nordea.lu to find out more.