Canada

Royal Bank of Canada on Thursday priced its second SEC registered covered bond of the year, a $1.5bn three year deal, through joint leads Citi, RBC Capital Markets and UBS. The transaction took advantage of strong market conditions and a thirst for Canadian exposure unlikely to be quenched until at least the second quarter next year.

Canadian banks have issued five benchmark covered bond deals so far this year with a total value of $11.75bn, reinforcing their position as the dominant issuers of US dollar covered bonds. Demand for Canadian covered bonds has remained robust and recently valuations have improved on expectations of diminishing supply. This fundamental value is a function of the strong credit worthiness of Canadian banks and the underlying mortgage collateral which is largely insured by the Canadian Mortgage and Housing Corporation (CMHC), Canada’s national housing agency. The high quality collateral, along with CMHC insurance, gives US investors a lot of comfort and an ability to view these bonds as having minimal credit risk, almost as quasi agency bonds. And with US domestic market supply of agency bonds contracting, investors have had considerable cash to put to work.

The Canadian government has released details of domestic covered bond legislation that will ban issuers from using insured mortgages as collateral. Spreads of Canadian covered bonds issued under the new framework will be wider than those backed by insured mortgages, said analysts, and with just months to go until the ban comes into place, a last flurry of insured deals could hit the market.

Canadian issuers will no longer be able to use insured mortgages as collateral for covered bonds. Finance minister Jim Flaherty introduced a bill into the Canadian parliament on Thursday that will create a register for covered bond issuers. The bill will also prohibit the use of mortgages insured by private insurers or by the government backed Canadian Mortgage and Housing Corp (CMHC).

Norway’s Sparebank 1 Boligkreditt became the third European issuer to bring a five year dollar deal in the last two weeks, with all three deals offering the same spread. Also in North America, the Canadian government released its 2012 budget, though details of prospective covered bond legislation remain scarce.

Toronto Dominion Bank raised $3bn of five year funding off a well subscribed book 6bp tighter than a recent trade from Canadian peer Caisse Centrale Desjardins du Quebec.

The global covered bond market continues to look strong, with a trio of issuers collectively raising the equivalent of more than €4.5bn, on the back of more than €9bn in demand across two currencies. But whether the market’s euphoria can hold out until the end of this week, however, remains to be seen as doubts are starting to creep back in with Thursday’s Greek liability management cut off date fast approaching.

The covered bond market remains extremely well supported, with recent deals all performing well and secondary flows largely one way. Commonwealth Bank of Australia and Toronto-Dominion have mandated for dollar trades. Yorkshire and Coventry Building Societies have left blackout but could turn to sterling. Bankinter has mandated in euros but is biding its time while Cédulas spreads tighten. ING DiBa is expected soon after roadshowing last week.

Caisse Centrale Desjardins du Quebec priced its second ever covered bond at the tightest level for a Canadian issuer this year. The $1.5bn 144a/Reg S trade attracted $2.25bn orders from 45 accounts on Tuesday, after over a month without Canadian supply.

Government owned Canada Mortgage and Housing Corp (CMHC) is approaching the statutory limit on the amount of residential mortgages it can insure. And, with the Canadian authorities keen to reduce the mortgage market’s reliance on the State, it is possible that draft covered bond legislation – that could be out as early as next month – excludes the use of CMHC-insured mortgage loans.

Bank of Montreal (BMO) seized on robust US demand for Canadian covered bonds, printing $2bn of five year notes on Monday. The deal brings total US dollar issuance this month to $6bn from three deals, a record for January.

Lingering concerns about the depth of the 144A market have been allayed after Bank of Nova Scotia’s $2.5bn deal on Friday on the back of more than $5bn orders took this January’s supply beyond last year’s almost record levels.