US dollar covered bond issuance has gotten off to a slow start compared with 2012 and, although appetite remains, Yankee supply could take its time picking up given a strong senior unsecured market and a lack of comparative pricing benefit, according to bankers.

A $2bn three year issue for Commonwealth Bank of Australia is the only US targeted covered bond to have been priced so far this year, with a deal for Korea Housing Finance Corporation (KHFC) the only transaction in the public pipeline. The Korean issuer announced the mandate, awarded to Citi, Nomura and Standard Chartered Bank, on Thursday, and starts a roadshow tomorrow (Wednesday).

This year’s year-to-date supply volume of $2bn compares with $6.6bn of US targeted issuance that had hit the market by this time last year, to which Canadian issuers contributed the most – via two new issues and a tap – and Switzerland’s UBS the rest.

Except for Royal Bank of Canada, whose covered bonds have not been backed by mortgages insured by Canada Mortgage & Housing Corp (CMHC), Canadian covered bond issuers have been absent from the market since March 2012 as legislation prohibiting CMHC-backed issuance as well as establishing a stronger, legislative framework was introduced. The legislation came into force in July, with five months passing before CMHC in December released requirements for the framework, which issuers, including RBC, will now be in the process of meeting. No issuers or programmes had been registered with CMHC at the time of writing.

The absence of Canadian issuers in the covered bond space has regularly been noted by syndicate bankers as having a noticeable impact on US dollar benchmark supply, with one also highlighting that Australian issuers, which were active in US dollars after they were given the go-ahead to issue covered bonds in the autumn of 2011, have been focussing on the senior unsecured market so far this calendar year.

ANZ, NAB and Westpac have issued in the US senior unsecured market and the next step would be for them to look at covered bonds, he suggested.

“I wouldn’t be concerned about the Aussie covered not coming yet,” he said. “I think they’re down the road. For them it’s a bit of sequencing.

“Senior unsecured levels are very attractive now and I think you saw some of the Aussie banks take that risk off the table given that some of the covered spreads have been so stable and there’s been a lot more volatility in the senior unsecured space.”

He was relaxed about the prospects of Yankee issuance picking up, noting that it is still only early in the year and that the market is “primed and ready to respond to potential supply” and that supply will eventually materialise.

The strong senior unsecured market, though of course a positive state of affairs, is getting in the way of Yankee covered bond supply, according to syndicate bankers, because of the performance potential it offers compared with covered bonds.

“The senior unsecured market is very robust, as is anything with room for a rally,” said one. “The euro market is offering better levels in covered than in dollars and in the US there is also a bit of angst in the rates market over where Treasuries are going, which is limiting how tight rates products can go.

“There’s definitely demand, though. Nothing’s changed there.”

Another syndicate banker was bearish on the outlook for US targeted covered bond supply given how well senior unsecured bonds have been performing.

“There’s tons of demand but no pricing benefit versus euros,” he said, playing down the prospect of diversification trades without this.

“There’s no evidence of issuers, except maybe ING, paying up for diversification,” he said.

A $1.5bn 10 year deal for Dutch issuer ING Bank in November last year came at what some syndicate bankers away from the leads said was a considerably wider level than where the issuer could have tapped the market in euros. An official at the issuer acknowledged that it had paid a premium versus euros, but said that it was in line with what other issuers pay and normal for a diversification exercise.