Solvency II and Basel III united in a (covered) bond Record level of covered bond issuance may quench insurers’ thirst for long-dated debt. The FT reports that the large amounts of covered bonds being issued by banks to comply with Basel III may offer one of the most efficient ways of investing in long term bonds under Solvency II. This may help reconcile the mismatch of supply and demand for long dated debt between banks and insurers. [caption id="attachment_1357" align="alignleft" width="132"] European covered bond issuance[/caption] European covered bond issuance has returned to pre-crisis levels (see chart left), while UK sterling issuance in 2011 has already reached close to £6 billion, the FT reports. Insurers and pension funds hold 18% of UK regulated covered bonds (see chart below). [caption id="attachment_1358" align="alignright" width="227"] Investors in regulated covered bonds[/caption] However, covered bonds have come under scrutiny. The Cut (FT Alphaville blog) noted in March that a US House of Representatives bill may dilute the strength of US covered bonds. “While European banks have used covered bonds’ conservatively managed pools of loans to lower borrowing costs, most loans are high-quality mortgages. US proposals would add student or car loans that could attract different investors drawn to risk rather than stability.” Richard Ryan, senior credit fund manager at M&G, told the FT there was an issue with the transparency of some of these ultra safe US covered bonds. “The worst ones label themselves ‘covered’ but offer a rollercoaster ride rather than disclosure or protection. Chasing their yield and piling in with no analytical backup is foolhardy,” he said. In April the FSA published a Review of the UK’s regulatory framework for covered bonds.