An emerging interest in covered bonds from Asian bank treasuries is adding to an established bid for the asset class among the region’s central banks, according to some bankers, with regulatory and yield considerations driving the development – although others questioned the extent to which covered bonds would benefit from these trends.

Marko Nikolic, head of covered bond origination at Nomura, recently returned from a European financial institutions conference organised by the investment bank in Hong Kong, and said that local investors were showing an interest in covered bonds.

“Quite a few said that they were explicitly migrating away from other traditional asset classes they looked at in the past, like tier one and tier two and even senior unsecured, given the lack of clarity around bail-in risk,” he told The Covered Bond Report.

Lorenz Altenburg, head of covered bond syndicate at Nomura, said that some Hong Kong banks have become increasingly interested in covered bonds, and that this is reflected in secondary market purchases and orders for some of the new issues that have been launched since the benchmark market reopened on 24 August.

“To some degree there is also more interest out of Japan, but this is still somewhat muted,” he added. “But there has definitely been a change in tone, with this demand from some Hong Kong based bank treasuries adding on to a typical southeast Asian central bank bid.”

The development is encouraging, he said, even though there is a focus on top quality issuers from core jurisdictions.

Uncertainty about the bail-in risks posed by senior unsecured bank debt, the closure of that market segment, and local regulators’ discussions on the Basel III liquidity framework were some of the reasons cited by market participants as driving interest in covered bonds from Asian bank treasuries.

“Awareness that the New Zealand covered bond market is broad and that the Aussies are getting on board, a Korean deal earlier this summer, and talk of Thai and Malaysian covered bonds are a driver,” said Nomura’s Altenburg. “The senior market is shut down so covered bonds are being looked at as a proxy for European bank credit.”

Nikolic at Nomura said that support for covered bonds also appears to be coming from local regulators.

“They are encouraging local banks, in light of CRD IV and the Basel III liquidity coverage ratio, to increase their covered bond holdings,” he said.

Another factor prompting bank treasuries to move toward covered bonds, he added, is the extra yield they can offer compared with that obtainable in the supranational, sovereign and agency sector.

Ted Lord, head of European covered bonds at Barclays Capital, agreed that covered bonds are increasingly appealing to Asian investors, including bank treasuries.

“Their lower spread volatility compared to many government bonds enhance their ‘safe haven’ status for Asian central banks,” he said, “with more looking to enter the asset class in the near future.

“Additionally, liquidity tightening moves in China and Hong Kong are pushing Asian bank treasuries to seek yield on low risk weighted assets.”

Other covered bond bankers said it was important to be cautious in interpreting developments in Asian investor appetite for covered bonds, with one questioning whether banks with offices in Hong Kong should be considered as a source of Asian demand.

And Eldar Mezbur, head of covered bond origination at Goldman Sachs, said that while Hong Kong and Singaporean bank treasuries and asset managers were indicating that they planned to start looking closely at covered bonds, “people should not jump the gun”.

This was because these investors could obtain higher coupons by investing locally, thereby also avoiding foreign exchange risk, he said.

“There are certain limitations, and I don’t think that bank treasuries in Asia will be involved in the size that people would like them to be,” said Mezbur. “Also, there is a difference between potential interest in the product and investing real cash – there will be a time lag.

“For me there is a bit too much hype compared with what is the reality.”

However, he said that Asian bank treasury and asset manager interest in covered bonds was a “natural progression” of involvement in the asset class by the region’s central banks and sovereign wealth funds.