What They Are and How to Invest

To invest in covered bonds, you can buy them through a brokerage firm or directly from issuing banks. But before investing, you should assess the creditworthiness of the issuing institution and understand the specifics of the underlying asset pool. Here are four general steps to help you get started.

Covered bonds are widely available in European, Canadian, and select U.S. markets. Be sure to research the different covered bond programs, their underlying asset pools and credit ratings before investing. Agencies such as Moody’s, S&P, and Fitch provide credit ratings for covered bonds based on the issuing bank’s financial health and asset backing. Most covered bonds have AAA credit ratings, but it’s still important to assess the issuing bank’s financial strength and the bond’s regulatory framework.

Covered bonds can be purchased in several ways:

• Through bond markets: Institutional investors can buy covered bonds directly from international bond markets.

• Via mutual funds and ETFs: Some bond mutual funds and exchange-traded funds (ETFs) include covered bonds in their portfolios, allowing retail investors access without purchasing individual bonds.

• Through brokerage accounts: Certain brokerage firms offer access to covered bonds, particularly in European markets.

Like other bonds, covered bonds provide fixed or floating interest rates. Investors should compare yields, maturity terms and interest rate trends to determine which bonds fit their investment portfolio. Longer-term covered bonds may offer higher yields, but are more sensitive to interest rate changes.

Covered bonds can complement government bonds, municipal bonds and corporate bonds in a diversified portfolio. Investors should balance their bond allocations based on risk tolerance, expected returns, and interest rate outlooks.

If you’re thinking about investing in covered bonds, here are six common benefits to consider:

• High credit quality. Covered bonds are typically issued by financially strong banks and backed by low-risk asset pools, reducing the risk of default.

• Dual recourse protection. Investors have the security of both the issuing bank and the cover pool, offering an additional layer of safety.

• Steady and predictable returns. Covered bonds provide consistent interest payments, making them ideal for income-seeking investors.

• Low default rates. Historically, covered bonds have extremely low default rates, making them a safer alternative to corporate bonds.

• Diversification benefits. Adding covered bonds to a portfolio helps diversify risk while maintaining stable returns.

• Regulatory protections. Many jurisdictions enforce strict regulations on covered bonds, ensuring transparency and investor protection.

Covered bonds are an attractive fixed-income investment offering safety, reliability and strong investor protection as a lower-risk alternative to corporate bonds and mortgage-backed securities. While covered bonds are more commonly found in European and Canadian markets, investors in the U.S. can gain exposure through bond funds, ETFs and brokerage firms offering international bonds.

• A financial advisor can help you analyze investment options and manage risk for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• If you want to diversify your portfolio, here’s a roundup of 13 investments to consider.

• And, if you want to know how much you could pay in taxes for the sale on an investment, SmartAsset’s capital gains calculator can help you get an estimate.

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