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For banks in need of capital, covered bonds are the holy grail of debt securities. That’s because the underlying mortgages used to collateralize covered bonds are nearly always backstopped by the taxpayer through insurance provided by the Canada Mortgage and Housing Corp.

Indeed, thanks to the CMHC they qualify as “quasi government guaranteed debt,” according to BMO Capital Markets analyst George Lazarevski, allowing players to benefit from the Canadian government’s triple-A rating even when theirs is lower.

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The numbers tell the story: The Canadian banks sold a whopping $24.7-billion of covered bonds last year, the highest ever. That compares to $17.3-billion in 2010 and just $1.4-billion in 2009.

Last year, the lion’s share — 84% — went to U.S. investors, with the remainder going to Europeans, Australians and Canadians, Mr. Lazarevski said in a research note.

Covered bonds are backed by bundles of debt, typically mortgages, that are “bankruptcy remote,” meaning that in the event the issuer runs into trouble and is unable to meet its obligations the collateral becomes the property of the investor. In effect, the bond holder benefits from three levels of protection: The bank itself, the pool of mortgages, and finally the taxpayer (through the CMHC). But it’s this last level that seriously juices the credit rating, enabling the issuer to raise capital nearly as cheaply as the government.