Global Rates Strategy: Carry over Compression: A Tactical Preference for Senior Preferred over Covered Bonds

Research evidence excerpt

Global Rates Strategy: Carry over Compression: A Tactical Preference for Senior Preferred over Covered Bonds

Global Research

13 July 2026ab

Global Rates Strategy Interest Rates

Europe including UKCarry over Compression: A Tactical Preference

for Senior Preferred over Covered Bonds Annalaura Capuano

Strategist

annalaura.capuano@ubs.com

+44-20-7567 1879

In the absence of a clear near-term widening catalyst, we express a tactical Julien Conzano

preference for carry through selective long Senior Preferred (SP) versus Strategist

Covered Bond (CB) positions. julien.conzano@ubs.com

+44-20-7567 2067

Strongest conviction in Germany and the Netherlands: here senior

Henry Morrison-Jones

premiums appear attractive relative to 12m average and we observe favourable

relative rating and duration characteristics. henry.morrison-jones@ubs.com

+44-20-7901 6656 France stands out as the clearest market where CBs appear more attractive

than seniors, with the current SP-CB differential sitting below its 12-month

average and offering insufficient compensation for potential election-related

volatility.

Intro

As we highlighted in our covered bond views at the start of the year, real-money investor

demand for covered bonds has broadened in recent years, extending beyond traditional

buyers to include credit investors who tend to favour the asset class when senior bank

spreads become overly compressed. Following the relative outperformance of senior

preferred debt versus covered bonds in 2024, covered bonds appeared particularly

attractive entering 2025. However, in 2026 we have observed a modest widening in the

spread differential between senior and covered indices. Additionally, our credit strategy

team believe credit spreads could compress tactically in Q3, supported by a low-vol,