A positive reception enjoyed by US dollar supply is likely to spur follow-up Scandinavian issuance, according to market participants, while a $3bn five year TD deal from Monday is said to have showed an encouraging development of the investor base.

Canadian issuers have dominated US dollar supply this year – and Bank of Nova Scotia has already been mentioned as a possible follow-up to TD – with the only other supply being two Swiss deals and an inaugural dollar issue from Commonwealth Bank of Australia on Monday. However, recently increased activity in US dollar covered bonds after a slow start in 2012 could lure further non-Canadian issuers to target the US, according to market participants.

A London-based syndicate banker said that there are “twitchings in terms of assessing the viability” of the US market, and that it would make sense for Scandinavian issuers to consider dollar covered bond issuance. However, he suggested that a broader range of dollar supply may be on hold this week pending developments surrounding the Greek PSI (private sector involvement) and European central bank meetings.

Natixis analysts said that Scandinavian issuance into the US has become likely “considering how well US dollar issuance is being received”.

They said that technical factors such as a lack of supply, thin trading levels, and buy-side liquidity have helped spreads to rally “massively”, with French issues performing the best over a one month period, tightening by 40bp-60bp over Treasuries and also performing well in terms of asset swap spreads.

“This strong performance also results from the high levels of yield reached in the previous weeks by European covered bonds compared to that of Canadian CBs,” they said. “Canadian CBs and Nordic CBs have also performed well since the beginning of the year, but to a lesser extent because of the relative stability of their spread levels in the course of autumn 2011.

“Since the beginning of the year, European issuers’ curves have tightened by circa 100bp for French CBs and 40bp for Nordic CBs versus swap.”

Indicative levels provided by the analysts include a spread of 125.4bp over Treasuries for a $2bn 2.9% March 2016 DNB issue, 121.5bp over for a $1bn 2.13% August 2016 Swedbank Mortgage deal, and 131.8bp over for a Barclays Bank $1bn 2.5% September 2015 issue.

TD branch, Chinatown, Washington, DC

Around $4bn of orders were placed for a $3bn Toronto-Dominion Bank five year covered bond on Monday, which together with a $2bn five year issue for CBA pulled an aggregate $8bn of demand.

Barclays Capital, BNP Paribas, RBS, and TD priced the Canadian bank’s issue at 45bp over mid-swaps, in line with guidance. The spread over Treasuries was 70.6bp.

A syndicate banker close to TD’s deal said that it was encouraging in revealing, with other recent transactions, a broadening of the investor base compared with the situation last year.

“In 2011 it was very concentrated at the top of the order book, with three to four accounts able to drive transactions,” he said, adding that more accounts have become bigger participants – “$100m plus guys” – and that demand is geographically diverse, too, with some Asian and Middle Eastern investors involved for the first time.

“The US market is becoming more and more developed as a broader range of investors comes in,” he said. “Investors in the $25m-$50m range in 2011 have moved up to the $100m range.”

He attributed this development in part to investors gaining comfort around secondary market liquidity in Canadian covered bonds, with the latter also in particular benefitting from money moving out of the agency market.

“Given CMHC-insured collateral, Canadian covered bonds are a logical substitute,” he said.

All Canadian covered bond programmes bar that of Royal Bank of Canada are based on cover pools insured by Canada Mortgage & Housing Corp (CMHC), a feature that has enhanced their appeal. However, the Canadian government is understood to be considering preventing CMHC-insured assets from being used as collateral for covered bonds, with CMHC nearing a C$600bn cap on bulk mortgage insurance. (See here and here for previous coverage.)

Asked about the extent to which this influenced TD’s transaction, the syndicate official said that investors “talked about it a bit” and that it is influencing demand and issuer behaviour.

Uncertainty about the availability of CMHC-insurance for covered bond collateral was part of the rationale for increasing the size of TD’s deal from a targeted $2bn, according to the syndicate banker.

He said “it would be logical to assume that both sides of the equation” are mindful of questions about the future of CMHC-insured covered bonds.