LBBW issued a 15 month benchmark public sector-backed Pfandbrief today (Monday) to open the primary covered bond market in a week in which syndicate officials expect to see little other activity despite positive sentiment and peripheral rating actions.

Crédit Agricole, Deutsche Bank, LBBW, Natixis and UniCredit built an order book in excess of Eu500m for the benchmark and have priced the deal at 13bp inside mid-swaps, the middle of guidance of the 13bp inside area.

The 15 month maturity makes this transaction the shortest of the year so far, and is atypical in general for benchmark covered bond issuance.

Jörg Huber, head of funding and investor relations at LBBW, said that the transaction is mainly an asset-liability management exercise and that there was an opportunity to generate more attractive levels through a Pfandbrief rather than taking term deposits in this maturity.

“We saw that there is strong demand from short term investors looking for very high quality assets who normally only have German government bonds to choose, so we thought it made sense to offer a transaction that provides a bit of yield pick-up”, he said. “Rates are not as attractive in the money market and we have huge overcollateralisation that we don’t use, so it made sense from that perspective, too.”

The issuer did not expect a huge amount of demand for today’s benchmark Pfandbrief given the short dated maturity, and the size of the order book is in line with its expectations, added Huber.

According to syndicate officials at and away from the leads, the deal caught the market by surprise, with one noting that in general the market seemed quite quiet.

“The upgrade of Spain is in general very good, and with the overall tone of peripherals positive, issuers should monitor this,” said a syndicate banker away from the LBBW deal. “However, despite there being the demand and the cash available, we are lacking issuers.”

Another syndicate banker said that Portuguese issuers still consider the covered bond market to be too expensive and that Spanish banks have much lower funding needs than in previous years, which has been keeping them away from the market.

An industry conference taking place this week in London on Thursday and Friday is expected to further stifle covered bond issuance, according to syndicate officials.