A series of Canadian covered bonds recently issued into a distressed market might normally be seen as a sign of strength, in being able to claim market access when others couldn't. But the sheer volume of deals done in one week made some question whether this sturdy group of borrowers were struggling for liquidity.
The first sign of trouble came on March 11, when Bank of Nova Scotia issued a five year euro benchmark at 20bp over mid-swaps, followed a week later by Royal Bank of Canada with an identical deal at double the spread. A few days later, Toronto Dominion Bank (TD) issued a four year at 50bp over, followed by Canadian Imperial Bank of Commerce with a three year at 48bp.
At the same time, all the major Canadian banks issued Swiss franc covered bonds and would have dived into sterling deals too were it not for a belly flop of an attempt by TD, postponing an attempt at a three year deal when asset managers failed to place orders.
The series of euro deals issued at wider and wider spreads continued last week when Bank of Nova Scotia returned with a three year dollar benchmark at 100bp over mid-swaps, which equated to 70bp when swapped back to euros. This was followed last Friday by TD, which issued a bigger deal at the same spread.
The dollar market is dysfuntional. Bids, even for one year paper, are rare, small and cheap. Issuing benchmarks into that kind of market smacked, to investors, of an urgent need to access liquidity.
Eventually, Canada’s Office of the Superintendent of Financial Institutions (OSFI) showed up to the rescue, just like a mountie — although seemingly one that still travelled by horse.
On the same day TD issued its dollar benchmark, OSFI announced a series of measures designed to ease the pressure on Canada's banks.
OSFI’s decision to change the rules at such a late stage, when the spread levels were already hit, may have been borne out by a view that Canada’s banks are among the best credits in the world. Unlike their more fragile European counterparts, they don’t necessarily need a central bank liquidity backstop crutch.
The regulator's moves provided welcome relief for Canada's banks, which have since issued and retained C$50bn of covered bonds for repo purposes. The move will probably lead to lower market supply and should help stabilise spreads. OSFI’s action provided positive regulatory signalling to the market about Canadian covered bonds, but above all else, it showed that regulatory and central bank support is sometimes necessary for even the strongest banks.