Fears that covered bond issuance by the major banks would crowd out issuers of residential mortgage-backed securities are abating. With the spread on covered bonds down to around 125 basis points in the secondary market, RMBS issuance was viable, Realm Capital's Rob Camilleri said.Speaking at AB&F's Mortgage Innovation conference in Sydney yesterday, Camilleri said: "As a benchmark, 150 basis points is the maximum all-in cost for RMBS. That includes the spread on the AAA tranches and [the] additional cost of the subordinated tranches."Anything wider than that does not work. With covered bonds coming in the way they have we would expect to see RMBS issuance this year."According to the Reserve Bank, the average cost of domestic covered bond issues was 170 basis points over the swap rate and the cost for offshore covered bond issues was 210 points.Since those bonds were issued in December and January, secondary market spreads have narrowed considerably.The chief executive of the Australian Securitisation Forum, Chris Dalton, said the Australian Office of Financial Management would need to maintain its support for small issuers this year.Dalton said: "The AOFM has about $5 billion left in its allocation. Spreads are coming but we have seen that they can reverse quickly. The AOFM's role is still an important one."He said overseas investors were encouraged by the Government's involvement in the RMBS market through the AOFM.Graham Mott, an assurance and advisory partner at Deloitte, said the major banks would dominate the mortgage market in the year ahead.Mott said the best strategy for small lenders was to compete in a different space. "We saw Pepper get $5 billion to buy GE's book last year. That demonstrated that there was investor appetite for near-prime issuance."Dalton said one of the positives to come out of the recent covered bond issuance was that new investors were buying Australian bank securities. "There were new investors putting limits in place in January. We have had people we have not dealt with before asking for information about our banking market and our residential mortgage market."Those investors were buying covered bonds, but that interest may feed through to RMBS."There is also interest in short tenor tranches from US money market funds. We may see some activity in that quarter as well."