An analysis of covered bond market in Asia Pacific

Abstract

After the worldwide mortgage-backed securities crisis (MBS) and European sover-eign crisis, covered bonds with their high-quality credit have become more popular as a substitute for MBS and government bonds, especially ones issued in Asia Pacific. This research combines a market overview with an in-depth study of credit spreads to examine the performance as well as the risk-level in Asia Pacific covered bond market. Also, the research explores the dynamic relationships between Asia Pacific covered bonds with Eu-ropean sovereign crisis and German covered bond market, a representative for European covered bond market. The research employs asset swap spreads as the indicator for the risk-level in covered bonds. In the studied period, the asset swap spreads in Asia Pacific covered bonds have tendency to decrease and currently catching up with spreads in Ger-man covered bonds. The results indicate that the risk level of Asia Pacific covered bonds has been reduced; and not credit risk but contracted liquidity risk is the main factor cur-rently driving down the risk level. On the other hand, the results reveal that the increasing dependence on European capital market makes Asia Pacific covered bonds largely influ-enced by European sovereign crisis thereby increasing the credit risk.