Covered Bond

DEFINITION of 'Covered Bond'

Securities created from public sector loans or mortgage loans where the security is backed by a separate group of loans. Covered bonds typically carry a 2-10 year maturity rate and enjoy relatively high credit ratings, depending on the quality of the pool of loans ("cover pool") backing the bond. Covered bonds are often attractive to investors looking for high-quality instruments that offer attractive yields. They provide an efficient, lower-cost way for lenders to expand their business rather than issuing unsecured debt instruments.

BREAKING DOWN 'Covered Bond'

Covered bonds originated in the European bond market. As of 2009, 24 European countries allow covered bond instruments to be originated and sold; each country has rules in place governing the investment. The EU created guidelines for covered bond transactions in 1988 that allowed investors to invest more of their assets in covered bonds over previous limits. The U.S. entered the covered bond market in 2006 but the financial services sector meltdown of 2007-2009 slowed the market's potential growth.

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