RBC reopened the dollar market yesterday (Tuesday) with a $1.75bn five year issue that was priced around 25bp wider than the last wave of supply, but bankers said the spread reflected secondary widening while the size shows that dollars are an alternative to the oversupplied euro space.

Royal Bank of Canada’s new issue is the first US dollar benchmark covered bond since DBS sold Singapore’s inaugural issue on 30 July, a $1bn three year.

RBC leads Citi, HSBC, RBC and TD priced the new $1.75bn (Eu1.56bn, C$2.29bn) five year issue at 72bp over mid-swaps. It was launched with initial price thoughts of the 75bp over mid-swaps area, before guidance was set at 72bp the number.

“We wanted to commence the market at a level that would definitely work, as it’s still a shaky market and this is the first trade post-summer,” said a syndicate official at one of the leads. “We started at 75bp with a high degree of certainty that the deal would work at that level, and we were pleased to be able to tighten that in to 72bp.”

Syndicate officials away from the deal noted the spread was substantially wider than those offered by preceding US dollar issues.

In the first half of the year most US dollar benchmarks came in the 30s area, with many priced at 37bp – among them a $1.75bn five year issue from TD in March. Spreads widened in the summer, with five year issues from Commonwealth Bank of Australia and CIBC, $1bn and a $1.2bn deals, respectively, coming in the mid to high 40s in July, and DBS Bank’s $1bn three year debut being priced at 37bp before issuance dried up.

“I rubbed my eyes when I saw that price,” said a syndicate official away from the leads. “Yes, markets have been complicated, but this is still quite a way from where we were.”

However, the lead syndicate official said the higher spread RBC paid versus pre-summer deals reflected secondary spread widening that had occurred in the meantime. He said Canadian secondary spreads had widened significantly this year, seeing them post-summer at around the mid to high 50s in the five year part of the curve and the low to mid-60s more recently.

“The trouble with this market is it is not very liquid and flows aren’t great in the product,” he added. “But given the sell-off we’ve seen in the broader credit space, including in euro covered bonds, it is natural to assume the secondaries in the dollar market had widened, and we have still seen a fair amount of trading.

“This jump in the spreads is just in response to the movement in this market and in the secondary markets in general.”

Another syndicate official away from the leads agreed.

“This issue will probably reprice the market for those that follow, but after that back-up in Canadian spreads you can’t say they got the pricing wrong,” he said.

He said RBC’s spread translated to around 25bp over mid-swaps in euro terms.

“They would surely have been able to print tighter than that in euros,” he said, “but there has been very heavy supply in that market, so it is sensible to split your funding.”

RBC sold a Eu1.25bn five year issue on 2 September after a Eu1bn seven year on 10 June. The last euro benchmark from Canada was a Eu1bn seven year for Bank of Montreal priced at 17bp over on 14 September.

RBC’s five year was quoted at 20bp, bid, yesterday, according to Maureen Schuller, head of covered bond strategy at ING, who said this was equivalent to 8bp tighter than the new dollar issue.

The syndicate official estimated the deal offered a new issue premium of around 8bp, based upon Canadian five years’ being quoted in the low 60s over mid-swaps. He noted this concession was in line with those offered by most recent euro deals.

The lead syndicate official meanwhile said that the result shows issuers that the dollar market is once again an option. While the final order book size was not disclosed, he said the size of the deal showed it was well absorbed.

“$1.75bn is big even for this market,” he said. “There was clearly good demand for this deal, so I don’t see why it would be different for the other frequent dollar issuers – the Canadians and maybe the Aussies as well.

“I think it is natural that people will have a look at this result and see that actually the market works, even if it is at a wider spread.”