The Royal Bank of Canada (RY.T, RY) sold a $2.5 billion batch of the world’s first publicly traded U.S. dollar covered bonds, triple-A-rated assets that carry the added protection of being backed by a pool of mortgages.
The sale marks the first time individual investors can purchase this type of bond. The mortgages backing the bond remain on the bank’s balance sheet, and investors have recourse to the mortgages should a lender default. That double layer of security enables the bonds to achieve a triple-A rating.
Covered bonds, which date back to 18th-century Prussia, have made inroads in the U.S. in recent years following the breakdown of the mortgage-backed-security market and ratings downgrades of sovereign nations’ debt. With conventional asset-backed securities, interest payments come solely from assets backing the bond.