CBA was overwhelmed with orders for a Eu1.5bn 10 year covered bond yesterday (Wednesday) that was carried by high quality German and French real money accounts, and a lead syndicate official said it confirmed that low yields need not be an obstacle to demand.

The deal was the Australian bank’s second euro benchmark this year, coming after a debut, Eu1.5bn five year in January that was priced at 100bp.

Commonwealth Bank building, Sydney

Yesterday’s deal met with Eu4.5bn of demand from 129 accounts, allowing the leads – Deutsche Bank, Barclays, Commonwealth Bank of Australia and UBS – to price it at 89bp over mid-swaps, well inside initial price thoughts of the 100bp over area and also the tight end of official guidance of the 92bp over area (+/- 3bp).

A syndicate banker at one of the leads said that the order book exceeded Eu2bn in 30 minutes, at which stage the official guidance was set, with the leads closing the order books after 1.5 hours.

The trade came with a 3% coupon and another lead syndicate banker said that, as shown by long dated deals for BNP Paribas and DNB Boligkreditt in March, low yields need not be a concern, in particular if a relative value argument can be made.

This was the case in Commonwealth Bank of Australia’s deal, according to the syndicate official, who noted that the Australian covered bond curve is steeper than European covered bond curves and that it looks attractive versus the senior unsecured long end for core European names, and that, coming at 150bp over Bunds, it also offers a yield of nearly double that on German government debt, with 10 year Bund yields at 1.73%.

Investor demand was driven by high quality French and German real money investors, according to another lead syndicate banker, with a majority of traditional covered bond investors participating in large size, with over 10 orders in excess of Eu100m.

Another said the level of participation from French investors was surprising, with five accounts providing aggregate demand of Eu1.25bn alone, taking nearly 40% of final allocations.

“I have never seen that in a non-French deal before,” he said, “and it’s something that no-one could expect, since for them it’s all about outright yield, and 3% is not the target.”

Low yields are not a reason for investor appetite to disappear, he added.

“DNB and BNP have shown that before and CBA yesterday just confirms it,” he said.

France was allocated 38%, Germany 23%, the UK 16%, the Benelux 7%, Switzerland 8%, Australia 3%, and others 5%. Fund managers took 58%, pension funds and insurance companies 28%, banks 10%, agencies 3%, and others 1%.