Bond markets take cover

Support is growing for a new type of security on the Australian bond markets – covered bonds. They could prove a handy source of funding for smaller banks looking to compete with the Big Four.

There may well be a new type of security on the Australian bond markets once the next phase of the economic recovery takes hold: covered bonds. These are essentially securitised mortgages that stay on a lender’s balance sheet, so if things go pear shaped, the investors in these bonds have a much more secure asset to back their investment.

It’s therefore not unusual for a tranche of covered bonds to be given a higher rating than the financial organisation issuing the paper.

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