Chichester District Council has invested £6.2m in UK covered bonds in anticipation of a downward trend of interest rates over the next few years.
A council report revealed that Chichester had committed to the bonds in March 2024, with the investment maturing in 2027.
The report indicated that this allocation is part of Chichester’s five-year, £15m medium-term investment plan, with £3m allocated to each tranche for investment in covered bonds and supranational bonds.
Covered bonds are debt instruments secured by a cover pool of mortgage loans or public-sector debt, typically with a maturity range of two to five years.
“The new investment of £6.199m in covered bonds into 2027 was a reflection on the anticipated interest rate cut and the downward trend into the next few years,” Chichester’s report stated.
According to Mark Swallow, director at treasury advisory Arlingclose, covered bonds are a “good investment in a falling rate environment” due to the value of the bond tending to increase when interest rates fall.
Conversely, when interest rates rise, the value of these bonds typically decreases, as newer bonds issued at higher rates become more attractive.
This comes as the Bank of England reduced the bank rate to 5% in August, down from a 16-year high of 5.25%.
Alongside this, the bonds offer local authorities “good returns” and liquidity, while maintaining a “high credit quality” as most covered bonds are rated AAA, Swallow explained to Room151.
He added that covered bonds also avoid “bail-in” risk, as “with these bonds they are separately ring fenced from the bank, they are therefore ‘bail in’ exempt. So, you are safe against any default if the bank gets into difficulties”.
Chichester council’s total investment balance is currently £103.7m, with £38m in local authorities, £19.5m in money market funds, £6.2m in covered bonds and £40m in long-term strategic pooled funds.
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