The market for Swedish covered bonds and links to financial stability

Covered bonds are characterised by an increased level of safety for the investor in the form of a claim on the issuer as well as on an underlying collateral pool. This article shows that covered bonds are one of the most important sources of funding for the Swedish banks, particularly for funding mortgages. The market for covered bonds is also important to the role of the major banks as market makers. In Sweden, the market for covered bonds is characterised by large issues of bonds, frequent smaller on-tap issues and market makers that set prices on the secondary and repo markets. One advantage of using covered bonds is that they help to reduce funding costs for the banks. As the Riksbank has previously pointed out, the banks' extensive funding through covered bonds is also associated with certain weaknesses. Renewed stress on the international capital markets and a fall in house prices in Sweden are factors that could impair the functioning of the market.