Investors seek safer, shorter covered bonds

By Maya Thatcher

LONDON, Jan 11 (Reuters) - Investors took a conservative approach to covered bonds as the 1.7 trillion euro market reopened this week, with short-dated paper from the established German market finding most favour, analysts said.

The covered bond market has moved into sharp focus in recent months as it has faced unprecedented turmoil while also being expected to become an ever more important funding tool for banks eager to raise cash, particularly with the securitisation market effectively shut.

Covered bonds are backed by mortgage or public sector loans which remain on the borrower's balance sheet. They have historically been highly liquid and typically rated triple-A by ratings agencies thanks to the quality of the assets and legal support, making them appear a surrogate for government bonds.

UniCredit (HVB) credit analyst Florian Hillenbrand said there had been clear demand for instance for bonds maturing in 2009 and 2010 from German issuers, the mainstay of the covered bond market.

But the market in general remained caught up in the turmoil that started last year.

"The world did not change just because Christmas is over," Hillenbrand said.

That was acknowledged by the European Covered Bond Council (ECBC) on Friday when it eased trading conditions set at the start of the year, allowing for transactions trading at wider spreads to be quoted at triple the normal bid-offer spreads. [ID:nL11231767]

Only the previous week, the ECBC had recommended that covered bond market-makers should commit to trade between themselves at double the normal bid-offer spread on a deal of 15 million euros minimum for all bonds, an improvement from the triple bid-offer spread requirement set across the market late in 2007.