As turbulence continues to rattle global financial markets, many investors are seeking refuge in traditionally safe assets, including government bonds. In an exclusive interview, Henrik Stille, Portfolio Manager of Nordea’s European Covered Bond Strategy, discusses the challenges faced by conservative investors and how high-quality fixed-income securities can offer a viable alternative in these uncertain times.

The Case for Covered Bonds

In light of current market challenges, Stille turns to a niche yet promising solution: covered bonds. Covered bonds are a type of fixed-income security issued by banks or mortgage lenders and secured by a pool of assets like residential mortgages or public-sector loans. These bonds are often viewed as an attractive alternative to government debt due to their dual layers of protection.

“Covered bonds offer something unique in today’s market,” says Stille. “They have a storied history spanning over 200 years, with not a single default recorded in that time. They have achieved this remarkable track record by providing two layers of security: first, the recourse to the issuer’s assets, and second, access to the cover asset pool, which is typically over-collateralized. This over-collateralization ensures that the bondholder is well-protected in case of issuer default.”

Advantages of Covered Bonds

Stille is quick to highlight the numerous benefits of covered bonds, particularly during times of market volatility. “Covered bonds offer an appealing combination of low risk, stability, and abundant liquidity. The regulatory treatment is favorable as well, which is a big draw for investors.” Indeed, covered bonds are considered senior secured debt, exempt from bail-in measures, and classified as high-quality assets under European banking regulations. This regulatory advantage makes them especially attractive to investors seeking stability.

Additionally, covered bonds offer diversification benefits. According to Stille, they tend to be less volatile than corporate debt, showing lower levels of credit-related volatility and reacting more predictably to market shifts. “Covered bonds generally tighten in rising markets and widen in risk-off environments, but they tend to be more stable than corporate bonds,” he explains.

A Viable Source of Safety

For investors looking for security, Stille believes that the €3 trillion European covered bond market is a solid solution. “Covered bonds have the capacity to deliver consistent returns, even during challenging times. They offer an attractive alternative for those looking for stable, steady income streams.” ^*

Nordea’s Danish Fixed Income & European Covered Bond Team actively manages its European Covered Bond Strategy, leveraging years of experience and expertise to identify market inefficiencies and opportunities to enhance covered bond returns. “We use a dynamic approach to investing in covered bonds,” Stille explains. “By staying on top of market trends and identifying opportunities for enhanced returns, we can offer our clients the kind of consistent performance that is especially valuable in today’s environment.”

As global financial markets continue to navigate volatility, Henrik Stille is optimistic about the role of covered bonds in providing stability for conservative investors. “In a world of uncertainty, covered bonds remain a safe and reliable asset class,” he concludes. “They offer investors the security of high-quality fixed-income assets while also providing the potential for consistent returns. In today’s unpredictable environment, that’s a powerful combination.”* For investors seeking shelter in the tariff storm, covered bonds can provide shelter.