Canada's Bank of Nova Scotia is set to test the appetite for covered bonds in Australia with the launch of a three-year bond and has mandated four investment banks for the issue.The bank's inaugural offering follows strong demand for fellow Canadian Imperial Bank of Commerce's covered bond in October last year. However, another Canadian bank, Royal Bank of Canada, now seems to have shelved the covered bond issue it was planning last September.CIBC last October sold $750 million of three-year covered bonds at a coupon of 5.75 per cent, which represented a spread of around 91.25 basis points over government debt.While it is expected that covered bonds will have good demand in Australia where local regulations do not yet permit banks to make such issues, some experts believe the spreads offered may not compensate enough for the risk premium on such issues.From an issuer's point of view, a covered bond in Australia offers diversity in funding source and the advantage of a stronger currency. But the rates may be a big disadvantage. For example, the 5.75 per cent rate that CIBC pays on its Australian covered bond is the highest-ever coupon paid by the bank and compares with around two per cent it pays on a similar US dollar denominated covered bond.CBA analysts believe that covered bonds will be the new kid on the block following the government's commitment to open the market. CBA expects demand for the product to be strong as it will be a ready replacement for the expiring AAA-rated bank bonds guaranteed by the government. It is likely that foreign issuers are lining up to take advantage of this replacement demand.