Covered Bonds Hold Their Ground as Issuance Rises

What You Need to Know:

• Covered bonds remain resilient, backed by strong collateral and legal protections.
• Q3 issuance reached €170 billion: up 22% year over year and 10% above full-year 2025.
• Liquidity, capital treatment and hedging costs shape investor value.
• Regulatory changes could expand cross-border demand.
• New issuers and broader participation could fuel growth, especially in Central and Eastern Europe.

Covered bonds have long occupied a distinctive place in bank funding and high-quality fixed-income portfolios. The dual-recourse structure, high-quality collateral pools and established legal frameworks have helped the asset class remain stable through periods of elevated rates and wider market volatility. Today, that resilience is being tested alongside a substantial increase in supply, changing relative-value dynamics and an evolving regulatory landscape. We examine the forces shaping issuance, investor demand and regulatory recognition of covered bonds, and what could unlock the next phase of growth for this asset class.

A resilient market meets higher supply

Over the past 12 to 18 months, the most notable feature of covered bonds has not been aggressive spread tightening, but its limited reaction during periods of market stress. While senior preferred and Tier 2 bank debt have experienced more pronounced widening during episodes of rates and geopolitical volatility, covered bond spreads have generally moved less.

Three factors help explain that performance:

1. The asset class combines dual recourse with high-quality cover pools and well-established legal protections.
2. A significant share of demand comes from investors allocating for liquidity, regulatory or strategic reasons rather than making short-term spread trades.
3. Reinvestment demand and a well-supported technical backdrop have helped absorb increased issuance.

Supply has risen meaningfully. Approximately €170 billion of covered bond issuance through the end of the third quarter, around 22% above the same period a year earlier and 10% above full-year 2025 issuance. The increase reflects several forces:

• elevated redemptions and refinancing needs,
• loan growth running ahead of deposit growth at some institutions,
• continued competition for retail deposits and
• the normalisation of market-based funding as reliance on central-bank liquidity facilities declines.

For issuers, however, covered bonds are only one part of a broader funding strategy. Treasury teams must balance funding cost with collateral usage, asset encumbrance, investor diversification and balance-sheet efficiency. The lowest-cost option at a particular moment is not always the best strategic choice.

Why investors continue to allocate

For investors, covered bonds sit at the intersection of credit quality, liquidity, regulatory recognition and downside protection. That combination can make them attractive even when they do not offer the widest nominal spread.

Bank treasury investors typically assess covered bonds against sovereigns, supranationals, agencies and other highly liquid assets. Asset managers may compare them with senior bank debt, while insurers and pension funds often focus more closely on outright yield and portfolio construction. For these investor groups, the focus is shifting from the additional spread available to how efficiently they can earn that spread, factoring in liquidity, capital treatment and downside risk.

Liquidity is central to the analysis. Investors consider the depth of the secondary market, transaction size, issuance frequency, bid-offer spreads, dealer support and central-bank eligibility—as well as how an instrument may perform under stress. Regulatory treatment also shapes the economics: Liquidity Coverage Ratio eligibility, high-quality liquid asset classification, risk weights and repo eligibility can all influence the value of an investment.

Currency adds another layer. Issuers assess euro, U.S. dollar, sterling and other markets in parallel, weighing funding cost, execution certainty, investor diversification and maturity profile. Investors, meanwhile, often compare opportunities on a fully hedged basis. Changes in the cross-currency basis can materially alter relative value, even where the underlying issuer and structure are broadly similar.

Regulation is reshaping cross-border opportunity

Regulation remains fundamental to the covered bond proposition, particularly for bank treasury investors. It does more than determine whether an asset qualifies for a portfolio: it can influence demand, relative value and the return generated for each unit of liquidity or capital consumed.

Several jurisdictions are reviewing how high-quality covered bonds should be recognised in an increasingly global market.

• In Europe, discussion continues around a potential third-country equivalence regime.
• In the U.K., the Overseas Prudential Requirements Regime is intended to provide a framework for assessing overseas covered bond regimes alongside the implementation of Basel 3.1.
• Canada has proposed a new Level 1B high-quality liquid asset category that would include highly rated covered bonds.
• Australia is reviewing its liquidity framework and the potential treatment of covered bonds.

These initiatives remain at different stages, and final design and eligibility criteria will be important.

The direction of travel points less towards a single global rulebook and more towards mutual recognition of frameworks that deliver comparable outcomes. National regimes reflect local mortgage markets, legal systems and funding models; complete harmonisation may therefore be neither practical nor necessary. Greater consistency and predictability in regulatory recognition could nevertheless reduce friction, support cross-border investment and create a more level playing field for issuers.

Where could we see the next phase of growth?

The future growth of the covered bond market is likely to come from both new issuers and a broader investor base. Central and Eastern Europe stands out as an area of momentum with Poland, the Czech Republic, Hungary and Slovakia among the markets to watch. The emergence of new jurisdictions also matters: the panel materials highlight Israel’s international euro covered bond debut as an example of how the market can expand beyond its traditional base.

On the demand side, clearer regulatory recognition could encourage greater participation from U.K. bank and building-society liquidity portfolios, while further progress in markets such as Singapore and Korea could support additional Asian treasury demand. Canada’s proposed liquidity treatment changes may also influence domestic demand over time. Issuers can help broaden participation through consistent market access, transparent disclosure, well-structured transactions and sustained investor engagement. Benchmark size and reliable secondary-market support can strengthen liquidity, while issuance across currencies and maturities can help build a more diversified investor base. The objective is not simply to secure the tightest pricing on a single transaction, but to develop durable access across markets.

A durable role in global funding markets

Covered bonds are not standing still. Higher issuance, more active cross-currency comparisons and regulatory change are reshaping how issuers and investors assess the asset class. Yet its core proposition remains consistent: strong credit quality, defensive characteristics and the potential for efficient liquidity and capital treatment. As markets become more global, the opportunity lies in making that proposition easier to access across borders. Greater regulatory certainty, continued investor education and disciplined issuance could reinforce covered bonds as a dependable source of bank funding and a high-quality anchor for investment portfolios.