Australia

Westpac has priced the first dollar-denominated benchmark covered bond of 2014. Though the cross-currency basis swap is unfavourable, the dearth of dollar issuance has caused spreads to tighten and the cost of funding was close to what it could have achieved in euros. The strong result is likely to have piqued interest in the market among Canadian and other Australian issuers.

Resimac and RedZed extended non-bank lenders’ second quarter dominance of the Australian RMBS market this week, but a big four bank is prepping a deal and ING Bank Australia is also set to embark on a global roadshow.

Credit sentiment is positive, and it seems unlikely that the European Central Bank would take anything other than an accommodative stance at next week’s policy meeting, but bankers are getting cautious that valuations are becoming overstretched, particularly in those markets which have until now been considered safe havens.

Westpac has issued its first euro denominated covered bond deal of the year and the second from an Australian issuer. The transaction was modestly oversubscribed as bank treasuries were absent due to the fact the bond is ineligible for bank liquidity buffers and for being repo’d with the European Central Bank.

Commonwealth Bank of Australia added to the trend for sterling floating rate covered bonds on Friday, issuing a £350m four year deal. It followed the recent three year sterling deals from Lloyds Bank and Abbey. Given, CBA’s lack of repo eligibility with the Bank of England, a smaller issue was expected. Meanwhile, Deutsche Hypothekenbank also issued a floater, bringing a €250m two year Pfandbrief.

Initial price thoughts are a useful price discovery tool in illiquid markets. But in core markets where liquidity is high, they can obfuscate how successful a deal has been. It is time to consider doing away with them where possible.

Thursday’s suite of covered bond issues from Australia and Switzerland underscored a growing impression among bankers that pricing core transactions is taking more forethought and effort. Whereas deals were invariably easy to price last year, demand seems to have become more finite. Books are taking longer to build as investors need more cajoling to meet issuers’ funding targets, in stark contrast to peripheral credits.

Four issuers from Finland, France, Australia and the UK are set to price covered bonds on Tuesday and Wednesday. Market conditions are broadly constructive, especially for higher yielding names, said bankers, but core issuers might have to offer concessions to tempt investors in a busy start to the year.

National Australia Bank raised $1.25bn of long five year funding at 47bp on Thursday. However, it did not attract the same demand as Westpac, which priced a $1.5bn deal at 46bp on Monday. Despite its wider spread, NAB priced tighter than Westpac, adjusting for the curve.

Commerzbank has returned for its fourth covered bond deal of the year, and the second off its new mortgage platform. It announced the €500m no grow deal on Monday, ahead of Abbey National Treasury Services launching its own deal (see other story).

Having issued a A$900m 10 year last week, Westpac returned to the covered bond market on Monday to mandate its second US dollar benchmark of the year. It follows recent dollar deals from Royal Bank of Canada and NordLB and will be the fourth in that currency from an Australian issuer this year. The deal news came as Fitch launched an Asian covered bond publication.

Westpac is set to price the second 10 year covered bond deal in Australian dollars, just three months after Australia and New Zealand Bank’s successful debut. This will be only the second Aussie dollar issue from a domestic bank this year, but the fourth in the currency, as Canadian issuers have also been prevalent.