The launch of a UBS US dollar covered bond today (Tuesday) is coming against a backdrop of positive spread performance of US targeted supply, according to syndicate officials who said they expected such issuance to pick up. Meanwhile, a latest US covered bond initiative failed.

The Swiss bank has been taking indications of interest for a five year deal, which would be the first dollar covered bond since Swedbank Mortgage on 16 March priced a $1.5bn five year deal that was seen coming flat to inside secondary levels. The transaction was priced at 105bp over mid-swaps.

Citigroup, CIBC, JP Morgan and Deutsche are working with UBS on the new issue and understood to have gathered more than $1bn of indications of interest. A syndicate official at one of the leads said initial price thoughts had not been announced publically, but would come out at the New York open. The leads are understood to have begun sounding out investors in Asia this morning.

Early price thoughts are understood to have been at a range of 105bp-110bp over mid-swaps.

A syndicate banker away from the deal put the issuer’s outstanding January 2015 US dollar benchmark, launched in January, at 78bp over swaps.

The syndicate banker suggested that UBS would come tighter in the euro market, putting a five year in euros at 45bp-50bp, while another syndicate official put the new issue roughly flat to where a UBS euro benchmark would come, noting that UBS’s January 2017 euro was at around 45bp over swaps.

However, a banker close to the new issue suggested that it was likely to come at the equivalent of around 57bp over mid-swaps in euros, and that this was roughly where a new euro benchmark for UBS might come.

UBS’s deal comes as syndicate officials told The Covered Bond Report they expected dollar issuance to increase, although one stressed the many “moving parts” that are involved in determining whether or not a European issuer will come to the US market.

He said that many issuers are eyeing the market, while another said that although she did not have a pipeline she would not be surprised to see some Nordic supply hitting the market this week.

Another syndicate official said that Nordic supply is top of investors’ wishlists, but that there has been some demand in the secondary market for “higher spread issuers”, citing Compagnie de Financement Foncier (CFF) and adding that BNP Paribas paper had tightened considerably.

DNB Nor tapped the US dollar senior unsecured market yesterday (Monday), pricing a $2bn five year at 215bp over Treasuries. The deal was its first dollar senior unsecured benchmark since 2006.

Thor Tellefsen, senior vice president and head of long term funding at DNB Boligkreditt, told The CBR that diversifying the issuer’s investor base was the main reason for opting for a dollar senior unsecured benchmark rather than a covered bond issue.

The relative strength of the euro market in covered bonds versus the dollar market also means that the issuer has no plans at the moment to launch a US targeted covered bond, he added.

“Today most issuers will have to pay up to go to the dollar covered bond market,” he said, “and although we will come back to the dollar market with a covered bond, we have no plans in the foreseeable future to do so.”

Tellefsen also said that DNB Boligkreditt prefers to use covered bonds to raise funding longer than five years, but that US dollar covered bond investors seem reluctant to go beyond five years.

A US-based syndicate official said that on a relative value basis covered bonds appeared a more advantageous choice than senior unsecured, with the differential between euro and dollar funding levels smaller in covered bonds than in dollars.

Recent senior unsecured deals in dollars from European issuers have performed fairly well, he said, but technical factors are more supportive of covered bonds.

He yesterday noted that covered bonds spreads are unchanged to around 5bp wider on the week, compared with a widening of 15bp-35bp for senior unsecured benchmarks.

Another syndicate banker said that the prospects for a resumption of US targeted covered bond supply would in part depend on US investors getting comfortable with the situation in Europe and the risks there, he added, with attractive funding levels available in a euro market flush with cash also a relevant factor.

One said that a Canadian issuer could “sneak” a deal before a likely announcement on legislation alongside the federal budget on Thursday, although another syndicate banker expected there to not be any such supply.

No JOBS Act covered bond amendment

Efforts in the US to attach a Senate covered bond legislative proposal to a broader piece of legislation, the JOBS Act, have failed, with the Act being passed on 22 March with only one amendment going through, on crowdfunding. The JOBS Act legislation was already passed by the House of Representatives on 8 March, and a final version needs to be agreed by the upper and lower houses.

A US based lawyer said that the covered bond amendment was dropped in “the Democrat cloakroom”, but its failure to get attached to the JOBS Act did not mean US covered bond legislative efforts are “back to square one”.

“It always helps to keep legislation in front of people and make people think about it,” he said. “It brings support and opposition out of the woodwork.”