Abbey sold a £1.5bn (Eu1.8bn) dual tranche covered bond yesterday (Wednesday) that followed record supply in the currency, and an official at the issuer told The Covered Bond Report that the sterling market’s growth sends out an important message to other currency markets.

The dual tranche covered bond was split into £750m tranches, a three year floating rate note and a 17 year fixed rate issue. Leads Barclays Capital, BNP Paribas, RBS and Santander priced the FRN at 165bp over mid-swaps, the tight end of guidance of 165bp-170bp, while the 17 year issue was re-offered at 245bp over Gilts, the tight end of guidance of the 250bp over area. Lloyds and UBS were involved as lead managers alongside the others on the long dated tranche.

Orders exceeded £1bn for the FRN and stood at around £2.5bn for the 17 year tranche.

The deal, launched by Abbey National Treasury Services, represents funding for Santander UK and, together with a Eu2bn three year Banco Santander cédulas transaction and a Eu500m long four year Banesto trade, means that Spain’s Santander banking group has raised Eu4.3bn of wholesale funding via covered bonds in less than a week.

A syndicate official at one of the leads said that it is well known that there is a strong structural bid for long dated paper in sterling, and that this demand can be tapped into if an issuer is willing to move along the curve and “be sensible” about the spread. The three year FRN is the fifth sterling covered bond in this format this year, and evidence of strong demand for very short dated sterling issues, too, he added.

Tom Ranger, head of secured funding at Santander UK, said that the transaction was fantastic, with the timing an important contributing factor.

“Timing is everything,” he said. “I would like to take the credit for it, but you never would have known that the market would be in such good shape at this time of the year.”

The deal comes after the issuer in the middle of January sold the first UK residential mortgage backed securitisation of 2012, Holmes 2012-1, which included a yen denominated tranche alongside euro, dollar, and sterling tranches.

“February was our month to look at covered bonds after our results,” said Ranger. “The timing worked well.”

Ranger said that the pricing differential between the issuer’s RMBS and covered bonds “is exactly where it should be”, with yesterday’s three year floating rate covered bond pricing 10bp tighter than a three year sterling FRN tranche sold as part of Holmes 2012-1.

The issuer chose to include a 17 year fixed rate covered bond as part of its offering because it fit its maturity profile well, after it sold 10 and 15 year sterling deals in 2011, and because it went beyond the maturities of recent sterling supply. The next longest sterling covered bonds this year were a £1bn 10 year from Barclays Bank on 5 January and a £1.25bn 13 year from Lloyds TSB Bank on 20 January.

A syndicate official away from the leads had yesterday wondered whether capping the 17 year tranche at £750m was designed to lend the tranche an element of scarcity value given “a differing of opinion” among investors about the spread, but Ranger said that the cap was highlighted in the very first announcement about the deal.

“The 17 year was in high demand, and although we’re happy to lock in the spread, to a certain extent there is a limit,” he said.

Abbey’s dual tranche transaction takes year-to-date benchmark sterling covered bond supply to £7.15bn, surpassing total volumes of £6.35bn in 2011, and Ranger said that the development of the sterling covered bond market is “massively meaningful”.

“Something that has been consistently pointed out to UK issuers since covered bonds were introduced here is that we don’t have a domestic market,” he said. “The last 14 to 15 months have proved that to be inaccurate.

“We have a fantastic market, and a product that we can fit to meet demand. It’s a massive benefit to UK issuers and sends an important message to other currency markets.”

RBS covered bond analysts said that while the majority of outstanding UK covered bonds is in euros, the sterling market is growing rapidly. They noted that the spread between covered bonds and respective Gilt benchmarks stands out as being much higher than in any other core European covered bond market. Covered bonds are on average 225bp-230bp wider than government bond spreads, they said. In addition, sterling covered bond spreads over swaps are larger than for euro denominated UK covered bonds.

Sterling covered bonds’ underperformance against their euro denominated peers since the end of last year is due to the ECB’s three year LTRO and its effect on euro denominated asset classes, they said.

Asset managers bought 64% of the 17 year fixed rate tranche, insurance companies 20%, banks 9%, and others 7%. The UK took 82%, Germany and Austria 5%, Switzerland 5%, Hong Kong 2%, the Benelux 2%, and others 4%.

Asset managers were allocated 56% of the three year floating rate note,  banks 39%, supranationals 3%, and insurance companies 2%. The UK took 79%, France 4%, the US 4%, Germany and Austria 3%, Italy 2%, and others 8%.