Covered bonds, corporate bonds and government bonds are different claims

explainerPublished 19 October 20261 min readfixed income

Key points

• Credit risk is who pays, with what assets, in what order.
• Duration still applies. Collateral does not cancel interest-rate risk.
• A fund can mix all three. The label on the fund is not the label on each bond.

What is going on

Government bonds can still be restructured or inflated away. They do not have a corporate default in the ordinary sense, and they do have political and currency risk if the bond is not in the holder’s currency. Corporate bonds add the firm’s earnings and its place in the queue: secured, senior, subordinated. Covered bonds, in the jurisdictions that have the statute, dual-recourse to the issuer and a cover pool, often mortgages or public loans. The cover pool can be weak even when the statute is strong. High-yield and investment-grade are rating labels, not a WiT Markets score.

Why it matters

Spreads compensate, imperfectly, for expected loss and for the chance the bond is hard to sell. A covered bond can trade tighter than the same bank’s senior bond and still fall when the cover pool or the bank is doubted. A government bond can rally while credit falls. Owning a fund that mixes them means reading the mix. This note does not print a spread. None was taken from a market.

What to watch

Read the issuer, the governing law, the rank and the duration. For a covered bond, read what is in the pool. For a fund, read the percentage in each bucket on a stated date.

Risks

Collateral can be correlated with the issuer. Rank can be changed in a resolution. Ratings move late. A ‘government’ bond in a foreign currency can be a different risk from one in the issuer’s own currency.