Decreasing liquidity in the secondary market for covered bonds is one of the primary challenges facing investors in that segment, says Fitch Ratings.
The rating agency reports that its latest survey of covered bond investors found that 53% of respondents cited decreasing secondary market liquidity as the biggest challenge face covered bonds. Concerns about liquidity ranked above sovereign risk and the overall health of the banking sector, which rounded out the top three, it says. Decreasing government support for banks ranked sixth, it notes.
Notwithstanding these concerns, Fitch says that 43% of respondents expect to increase their holdings of covered bonds in the coming year, 28% expect to remain more or less the same, 24% expect to somewhat decrease, and 6% say they will decrease substantially.
Each of the big six Canadian banks and the Caisse centrale Desjardins du Québec have issued covered bonds over the past couple of years, and the federal government has created a new legislative framework for these issues, as financial firms have looked to diversify their sources of funding in the wake of the financial crisis.
Overall, 52 investors responded to the survey, of which 12% have more than €20 billion of covered bonds under management, 20% have between €5 billion and €20 billion, and 68% have less than €5 billion in their portfolios.