Caisse de Refinancement de l’Habitat this (Friday) morning launched the first benchmark covered bond of the year, a Eu1bn 12 year deal that attracted some Eu2.7bn of orders almost flat to OATs on the back of positive market conditions and a lack of supply in the asset class.

Leads Barclays, BNP Paribas, Crédit Agricole, Deutsche, Natixis and Société Générale priced the no-grow deal at 46bp over mid-swaps, tightening the spread from initial price thoughts of 50bp over and guidance of the 48bp over area.

Market participants said that the outcome of the deal was positive and the pricing in line with expectations, mainly as result of the high amount of liquidity in the market and a dearth of covered bonds.

“Lack of supply, a good name, and it’s trading quite nicely,” said a syndicate official away from the leads. “All the things together make it a good transaction.”

Another agreed that technical were supportive of the transaction and said that the outcome was a good result for CRH given that it has “a pretty full curve” at the long end. He put the pick-up over an outstanding March 2024 CRH issue at 4bp, describing the new issue premium as quite small. The March 2024 was yesterday (Thursday) said by a lead manager to be at 42bp mid.

CRH’s new deal was also seen coming almost flat to OATs. A banker at one of the leads said that the spread over the interpolated OAT curve could perhaps be put at anything from flat to 3bp over, with the 2025 OAT having a very high cash price and no 2024 OAT, but he said that whatever the exact figure, it was “an outstanding result”.

“Since the middle of last year we have been trading French covered bonds through OATs, but it is a first for a French issuer to come with a new issue flat to OATs,” he added.

A syndicate banker away from the leads said that this was one of the reasons why the order book did not grow even further.

“Investors who look for long dated issues think twice whether to buy CRH or an OAT if the spreads are so close,” he said.

He added that longer dated French covered bonds usually price close to the sovereign curve, but even for a strong issuer such CHR it would be a “crucial move” to come issue inside OATs.

“I heard from some investors that the pricing versus the sovereign is already pretty tight, so I don’t expect a further tightening of the covered spread on the longer end, unless OATs compress further,” he said.

The oversized order book demonstrated a strong demand for the French name, despite the deal not offering particularly a generous return for investors, said another syndicate banker away from the deal.

“The yields are not that attractive,” he said. “46bp in 12 years is less than 2.5%.”

“All in all, yields are fairly low but the trade has had good support because of the lack of supply that there has been in the covered bond space.”

Another syndicate banker said that the yield question was not as critical as in the past.

“Especially for highly rated products such as CRH’s covered bonds,” he added. “There’s a lot of liquidity out there, and there is always liquidity even for yields below 3%.

“It’s just limited supply, investors cannot be too picky,” he added.

The lead syndicate banker acknowledged that the spread to OATs meant that demand from French accounts in particular was not as strong as for previous CRH issues, but said that the order book was well balanced, with French and German accounts leading demand. He said that around 120 accounts put in orders totalling around Eu2.7bn.

“Obviously the fact that it was capped at Eu1bn definitely helped,” he added. “Supply prospects, especially compared with what we saw in January last year and with Eu35bn of covered bond redemptions this month, mean that there is good potential for secondary market performance.”

Market participants said the deal sent out a positive signal for the reopening of the covered bond market, with names from across Europe expected next week.