Bank of Nova Scotia is set to price the tightest US dollar-denominated covered bond of the year today (Tuesday), having set IPTs for a five year issue at the low 80s. However, a banker said funding levels in the dollar market no longer look as attractive versus euros as earlier in the year.

BNS’s deal is the first benchmark US dollar-denominated issue since 14 March, when RBC sold a $1.75bn five year issue – which was the third benchmark US dollar covered bond in a week, following a $1.75bn five year for Toronto-Dominion and a $1.4bn five year for National Australia Bank.

Bankers said at the time that interest in the market was increasing because developments in the basis swap meant US dollar issuance had become more attractive for certain issuers, calculating that the deals were priced roughly equivalent to the level at which the respective issuer’s five year euro paper was trading.

Bank of Nova Scotia leads BAML, HSBC, JP Morgan, Scotiabank and UBS launched the Canadian bank’s new five year issue this morning with initial price thoughts of the low 80s over mid-swaps. The deal is set to be priced after the US open.

Bankers noted that the deal is set to be the tightest priced benchmark dollar covered bond of the year, after RBC’s deal was priced at 93bp and TD’s at 95bp.

They said this reflected a tightening of spreads since March, with RBC’s and Toronto-Dominion’s March 2021s seen at around 70bp, mid – which implies fair value for the new BNS issue of 70bp, according to a syndicate official away from the deal.

“However, what is more interesting is the differential to euros,” he added.

The syndicate official estimated that a dollar spread of 82bp would be equivalent to around 20bp-21bp in euros, which he noted is wider than the 14bp level paid on a Eu1.5bn five year for Bank of Montreal last Tuesday (12 April), the last euro benchmark covered bond from a Canadian issuer.

“It looks relatively expensive compared to what can be done in euros at the moment, so they’re paying up to use this market and I would expect them to try and bring the price down,” he said.

No euro-denominated benchmark covered bond issuance has emerged this week, and bankers noted that financial institutions are focusing on other asset classes, with Rabobank today attracting Eu6.5bn of orders for a Eu1.25bn Additional Tier 1 issue and with Deutsche Pfandbriefbank and Arion selling benchmark senior unsecured bonds.

Syndicate officials said the covered bond pipeline was relatively slim, with many issuers entering blackout periods in the coming weeks and after heavy supply in the first quarter – with issuers also having been relatively active in the first two weeks of April.

Issuers have sold Eu10.75bn of euro-denominated benchmark supply so far this month, exceeding total supply for any April in the last four years.

“This is historically quite a quiet time of the year,” said a syndicate official. “Things will probably slow now, but that is more a result of supply dynamics than a lack of demand or the market backdrop.”

However, bankers added that issuance conditions remained supportive, with tomorrow expected to be a good window ahead of an ECB meeting on Thursday, which some said has the potential to interrupt supply.

“We still have at least one good day this week, so you can’t rule anything out,” said one.