Buy 5Y covered bonds ASW - SEB572 ASW at 25bp.
P/L: 17/35bp
Carry/roll down: 1.8bp/m (0.85+0.75)
Despite the performance in covered bonds relative to swaps, we see good reasons to buy/add to already established positions. The environment for covered bonds is just too good to ignore.
1. Interest rates are grinding lower still on low inflation which is forcing central banks to remain supportive. On top of this, interest rate volatility is close to lows and volatility in spreads is also very muted. There is a close relationship between the interest rate volatility and covered bond spreads (see chart below).
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