Westpac took advantage of a strong contraction in absolute spreads and spreads relative to Canadian paper to launch its third US dollar covered bond yesterday (Tuesday), a $2bn (Eu1.54bn/A$1.9bn) five year issue that met with $3bn of demand and was priced tight to secondary market levels.

The Australian issuer priced the 144A/RegS benchmark at 50bp over mid-swaps via leads Barclays, Citi, JP Morgan and Westpac. Initial price thoughts were in the low 50s.

“We managed to collect a very strong order book and price it at the tight end of the range,” said a banker on the deal.

“The market was really strong yesterday,” he added. “Westpac took advantage of that and it paid off.”

Around 90 accounts are said to have participated in the deal, with 65% of the bonds going to US accounts, 20% to Asia, and 15% to Europe. Bank treasuries and fund/asset managers each took around one-third, and central banks and governments 20%, with the remainder allocated to a mix of accounts including insurance companies and private banks.

A banker on the deal said that Westpac benefitted from a lack of recent Australian benchmark US dollar supply in covered bonds and senior unsecured, and that the issuer launched the deal to take advantage of a “massive” contraction of spreads versus Canadian covered bonds, a key comparable for Australian issuers, and an outright tightening of absolute spreads.

“It was a good way to round out the calendar year,” he said. “In the US dollar market Australian spreads trade quite tight versus Canada and other comparable countries in senior unsecured and covered bonds.”

He put the new issue premium at between 0bp-3bp depending on comparables and how the curve is adjusted.

The deal is Westpac’s third and longest dated US targeted covered bond since Australian covered bond legislation was passed in the autumn of 2011, coming after a $1bn four year in November last year, and a dual tranche $2bn three year in July.

A re-offer spread of 50bp over compares with pricing of 72bp over for a $1.25bn five year for National Australia Bank deal that was the last US targeted Australian covered bond, in late September, before Westpac’s new issue.

A syndicate banker away from the leads said Westpac achieved slightly tighter pricing than he had expected, coming with a skinny new issue concession.

“A $2bn deal at this late stage of the year shows that demand is still quite robust,” he said. “The covered bond space is in good shape going into next year, and with net negative supply in US agencies there is a lot of cash to put to work in the rates pocket.”

Unless Westpac’s deal is followed by another benchmark by Friday it will most likely bring down the curtain on 2012 issuance, with next week widely seen as being too late to bring a covered bond transaction.

Although surpassing 2011 volumes, the US dollar covered bond market has been undersupplied this year, in particular as a result of most Canadian issuers being sidelined due to new legislation prohibiting issuance backed by CMHC-insured collateral, and this in addition to regulatory factors is supporting the covered bond market, said the banker.

At 61.9bp over Treasuries, Westpac’s deal offered incremental yield compared with the 5bp-15bp over range in which agencies are trading, and will therefore have been attractive to rates buyers, he added, with bank treasuries interested in the product for liquidity buffer reasons.