Bank of Montreal and Bank of Nova Scotia launched the first benchmark covered bonds in a week today (Wednesday), hitting sterling and US dollars, respectively, building on a wider pick-up in bond issuance and raising hopes that euro benchmarks could return despite ongoing Ukraine-induced uncertainty.

The new Canadian issues are the first new benchmark covered bonds since Argenta Spaarbank sold a €500m seven year last Wednesday (23 February), with the escalation of Russia’s invasion of Ukraine heightening financial market volatility in the interim. However, today’s covered bond supply came after a resumption of primary market activity from SSAs in euros and sterling over the past two days and also FIG issuance in the dollar market.

“It’s good to see covered bonds coming out,” said a banker.

Bank of Montreal (BMO) leads Barclays, BMO, Credit Suisse, Lloyds, NatWest and Nomura went out with initial guidance of the Sonia plus 42bp area for its March 2027 sterling benchmark, expected ratings triple-A. A £600m (€719m, C$1.02bn) deal was ultimately priced at Sonia plus 40bp on the back of some £630m of demand.

The pricing compares to 28bp for a Bank of Nova Scotia £1.3bn four year FRN on 17 January and 28bp for a Clydesdale Bank £600m five year floater on 8 February, the last two benchmark sterling covered bonds. The deal is also the smallest sterling benchmark from a Canadian issuer since October 2019.

A syndicate banker away from the leads said that BMO had, however, been able to price the new issue arguably flat to fair value, based on the bid side of where comparables were trading.

Bank of Nova Scotia (BNS, Scotiabank) opened books for its five year dollar benchmark with initial price thoughts of SOFR mid-swaps plus the 60bp area. The final terms had not been set as The CBR was going to press.

The last five year dollar benchmark was a $2.5bn five year for CIBC priced at 48bp on 11 January.

A banker away from the leads put fair value for Scotiabank’s trade at 57bp.

“So the new issue concessions on both transactions will have been pretty modest,” he added, “and certainly relative to what you would see in senior unsecured at the moment.”

The Canadians hit the market today after announcing their latest results yesterday (Tuesday) and a syndicate banker said it was natural for the two to approach the wholesale funding markets at such a point in their financial calendars, irrespective of prevailing market conditions.

“For me, it underscores the value of the covered option for the universal banks in a time of volatility and uncertainty,” he added. “It’s no great surprise to see the likes of the Canadians avail themselves of the opportunity, given the 50bp-plus saving this financing will achieve for them relative to the senior unsecured alternative in the same tenor.

“And the ability of a couple of deals in different currencies to co-exist is a good statement about the level of demand investors have for the underlying credits, which are performing well – there is certainly less volatility in that part of the world than we are probably feeling in Europe right now.”

He noted that BMO and BNS issued euro benchmarks in January, making their visits to the other major currencies a natural step, rather than implying anything negative about the state of the euro market.

A syndicate banker in Frankfurt, meanwhile, said the Canadians’ reopening of sterling and dollars did not necessarily mean the euro market would be open for business.

“But more generally, why not?” he added. “We saw SSAs ranging from long fives to seven years today. None were particularly cheap in terms of fair value considerations, but they went decently to very well, so it seems the market for top rated paper in euros is open.

“So there are options. The only question is, who feels like testing the bathwater?”

Austria’s Hypo Noe and Italy’s Banco BPM announced mandates on the day the last euro benchmark was launched, Argenta’s last Wednesday, but syndicate bankers said they expect a larger and more established issuer to reopen the euro market.

“I wouldn’t expect them to show up this week,” said one. “They’d be well advised to wait for one of the bigger guys to restart the show.

“As far as the Canadians are concerned,” he added, “if they are doing sterling and dollars, it shouldn’t be ruled out that they are looking at the biggest covered bond market as well.”