Italy’s UniCredit provided the first euro benchmark covered bond supply in just over three weeks today (Wednesday), with orders pouring in for a piece of a Eu250m tap of a January 2018 issue amid strong market conditions buoyed in part by Moody’s affirming Spain at Baa3.

The increase was capped at Eu250m from the outset, with some Eu1.4bn of orders placed during around 15 minutes of bookbuilding, according to a syndicate official at one of the leads – Crédit Agricole, Morgan Stanley, Natixis, Société Générale and UniCredit. Significant lead orders and reverse enquiry provided the impulse for the deal, he said.

The tap was priced at 190bp over mid-swaps, after guidance and initial price thoughts of the 200bp over area. This equates to roughly 80bp through 4.5% February 2018 BTPs, and compares with a re-offer spread of 290bp over mid-swaps and 97.5bp through Italian government bonds on the initial deal. That was sized at Eu750m in August and was the first benchmark covered bond to price substantially tighter than the sovereign of an issuer.

Syndicate officials suggested that the outcome of UniCredit’s tap was not surprising, and an indication of the strength of the market.

“A Eu1.4bn order book tells the whole story,” said one. “The market is definitely risk-on, and 80bp through BTPs is outstanding.”

There is a strong periphery bid, said syndicate officials, with good buying in cédulas, including tier two names, and multi-cédulas. Another said that investors are buying peripheral paper on the basis of a belief that core euro-zone governments will foot the bill to bail out peripheral sovereigns.

A syndicate banker on the UniCredit transaction said that the leads expected a quick bookbuilding process simply on the basis of the terms of the deal, with the size capped at Eu250m, but that the strong market tone and positive overnight news on Spain contributed to there being “great interest” for the deal.

Moody’s late yesterday (Tuesday) confirmed Spain at Baa3, noting that the risk of the sovereign losing market access has been materially reduced as a result of the ECB establishing an Outright Monetary Transactions (OMT) programme and that it believes Spain will probably apply for a precautionary credit line from the European Stability Mechanism (ESM).

RBS analysts said that most market participants had expected Moody’s to downgrade Spain to junk, and that they therefore anticipate a relief rally as Moody’s rating action removes immediate downgrade risk.

“Moody’s rating confirmation should be supportive for Spanish covered bonds,” they said. “We expect that multi-issuers and second tier names will benefit the most as they are still trading at a considerable discount to the likes of Santander and BBVA.”

The duration of such a positive trend will depend heavily on the Spanish government and its decision whether or not to apply for support from the ESM and in what form.