CBA priced the second US targeted benchmark covered bond of the year yesterday (Wednesday), a US$1.25bn (Eu921m) five year that a lead banker said was encouraged by a Westpac issue in May and could be supportive of further supply – although pricing needs to improve.

Leads Barclays, CBA, Citi and RBS priced the Commonwealth Bank of Australia deal at 35bp over mid-swaps, in line with guidance of 35bp over, on the back of some $1.5bn of orders. The transaction had first been marketed in the mid to high 30s over.

At 35bp over, CBA’s transaction was priced at the same spread as a $1.75bn five year covered bond for Westpac Banking Corporation on 14 May.

“CBA saw the success of the Westpac trade and there hasn’t been a ton of activity in the covered bond space,” said a banker at one of CBA’s leads.

He said that the aim was to achieve a level comparable to where Westpac priced its deal, although CBA should arguably perhaps price tighter than Westpac, and that comparables in the secondary market suggested fair value at 35bp over.

He said Westpac’s recent dollar issue was trading at 34bp over on a z-spread basis, NAB February 2019s at 33bp over and CBA’s most recent dollar covered bond, a December 2018, at 31bp over. That was a $1.5bn five year issue that came at 45bp over in December.

Some orders dropped out of the book for CBA’s latest issue when the leads set guidance at 35bp over, but most of the spread sensitivity was centred on this number and “there was not a lot of leverage to go through”, said the banker.

Around 45-50 investors participated in the transaction, according to the banker, who said that order books for US targeted covered bond issuance continue to lack granularity, being “top line heavy”, although they support “a fuller fill than in senior unsecured”.

However, CBA’s deal achieved “a good outcome”, said the banker.

“It’s supportive of additional issuance,” he added. “There’s a view that there may be more opportunities than there was three to four months ago, although I still think that the pricing has to be a bit more compelling before you see a huge rush by any of these borrowers.”

At 35bp over, CBA’s deal came roughly flat to where it would a new five year covered bond in the euro market, according to the banker. He put fair value for such a deal at 15bp-17bp over, equivalent to dollar mid-swaps of 35bp-36bp over.

“There’s a bit less arbitrage versus euros for the Australians,” he said. “That’s a helpful dynamic as they think about currency and product diversification going forward.”