The European market for trading “Covered Bonds” was shut down yesterday afternoon for at least a week, because of unprecedented volatility. Covered Bonds are asset backed securities, which are considered to be super-safe, because they are not only secured against highly rated mortgages, but also give the investor a claim against the issuer.

European banks were ordered by the European Covered Bond Council to cease trying to market these bonds to each other, at least until Nov. 26. Reuters reports that this action became necessary after the price of buying derivatives contracts to insure these securities against default, shot upwards, in extremely volatile conditions. “In light of the current market situation and in order to avoid undue over-acceleration in the widening of [default] spreads,” the Bond Council said it had to act.

This is a big escalation in the global financial crisis. The covered-bond suspension hits Europe’s banks in particular, because this trillion-dollar market is dominated by German banks such as Deutsche Bank. Covered bonds are one of the oldest, largest, and supposed-to-be safest parts of the bond market, even considered “surrogates for government bonds.” Yet now, they cannot even be traded by banks.

Don’t worry, though, it’s just a “slow down.” There’s no collapse, and it’s certainly not systemic. Eh?

This entry was posted on Thursday, November 22nd, 2007 at 9:55 am and is filed under Economy, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.