Canadian banks have issued record volumes of covered bonds so far this year, and that strong issuance activity is likely to continue through the end of the year, suggests a research note from New York-based credit rating agency Fitch Ratings.
Issuance volume this year for Canadian covered bonds (which are collateralized with residential mortgages) has already surpassed all prior years’ volume, the note says.
“Driven by interest rates near historical lows and strong investor demand for high quality assets, Canadian banks have issued over $31 billion [worth of covered bonds],” the note states. “In addition, they have been able to take advantage of the global market volatility experienced this year to diversify their funding for residential mortgages.”
Canadian banks typically rely on deposits as a primary source of funding for residential mortgage assets, and issue covered bonds when funding costs are attractive, the report says. Covered bond programs began in Canada in 2007.
These securities are typically issued in various currencies, the report notes, given the global investor audience for them. So far this year, approximately 60% of issuance has been in euros and British pounds, the note says, and approximately 25% has been issued in U.S. dollars, with the rest in Canadian and Australian dollars.
Issuance volume “may remain active through the end of the year and will continue to be driven by market conditions,” the research note says, adding that Fitch does not expect the banks to be constrained by the issuance limits of their existing covered bond programs, with an estimated $62 billion of new debt able to be issued under existing programs.