Portugal’s Santander Totta is pricing its first benchmark covered bond in four years today (Tuesday), a Eu1bn three year obrigações hipotecarias for which the leads were able to reel in the spread by some 12bp from a triple-digit start given strong excess interest for the bond.

Leads Bank of America Merrill Lynch, BNP Paribas, Crédit Agricole, Santander and UniCredit gathered more than Eu2.7bn of orders, on a pre-reconciliation basis, for what is the first benchmark covered bond from a privately owned Portuguese bank in several years.

Caixa Geral de Depósitos issued as recently as early January, pricing a Eu750m five year deal at 188bp over mid-swaps, but is owned by the Portuguese state. Banco Santander Totta’s last benchmark was a Eu1bn three year deal in March 2010, which was priced at 85bp over mid-swaps.

The Portuguese bank is pricing its new issue at 88bp over, after having begun marketing the transaction with initial price thoughts of the 100bp over area. Guidance was subsequently set at 90bp-95bp over, with the leads having collected more than Eu2bn of indications of interest.

Santander Totta was the only issuer in the covered bond market this morning but there was strong activity in other FIG market segments, with several bank capital deals announced and/or launched, and Leeds Building Society and Banca Monte dei Paschi di Siena providing senior unsecured supply.

“The deals today in senior unsecured and covered went really well,” said a syndicate official. “There was good tightening and good oversubscription, so the market is supportive.”

Another said that Italy’s MPS being in the market could be seen as “a sign of a frothy market”, adding that although the market felt somewhat heavy the primary market seems to be “operating in a bit of a void”.

Italy’s MPS is rated B2, BBB and BBB by Moody’s, Fitch and DBRS, respectively, and has been under pressure for some time but is targeting a Eu3bn capital-raising in late May.

The syndicate official away from Totta’s transaction suggested the strong demand for today’s Portuguese covered bond was to be expected given the short maturity and the chance “to get some spread”.

“If you’re a Brit or a German you’re paying negative to flat, so on a relative value basis within the asset class this offers a lot of yield,” he said.

Totta’s transaction was coming some 40bp through the interpolated Portuguese sovereign bond curve, and around 50bp wide of covered bonds issued by the issuer’s parent, Banco Santander, according to the syndicate banker. Caixa Geral de Depósitos has a January 2018 issue outstanding that is in the 110bp over area in the secondary market, he added.

Totta only had one public benchmark covered bond outstanding before today’s new issue was launched, an October 2014 deal, according to an analyst.

At 88bp over, the re-offer spread on Totta’s deal stands in sharp contrast to the 5bp over that Sweden’s Stadshypotek paid for a Eu1.25bn five year covered bond priced yesterday (Monday). The transaction was also oversubscribed, albeit not by the same degree as Totta’s (demand totalled around Eu1.75bn for the Swedish issue – see here for more.).

Another syndicate official away from Totta’s leads was unsurprised by the execution, saying it went according to the “usual Club Med” pattern.

“These deals work on the assumption that, probably, in the end if things turn sour someone will bail them out,” he said. “It’s not that things have fundamentally improved, it’s that there is liquidity out there and people are looking for opportunities to put their money to work.”

The triple-digit initial spread was a “carrot” for investors, he added.

“They take their fair share and assume that it will be two points tighter tomorrow,” he said. “There’s no magic to it, no great excitement.”