Bank of Montreal issued a well anticipated inaugural legislative covered bond today (Tuesday), a Eu1bn five year, while CFF surprised the market with a Eu1bn 10 year issue, with both clearly oversubscribed to get the primary market off to a good start after a two week lull.

The deals are the first in the covered bond market since Société Générale SFH priced a Eu750m 10 year at 26bp over mid-swaps two weeks ago, on 16 April. Several syndicate officials said they are not aware of further supply being lined up for launch this week, with a public holiday in parts of Europe on Thursday making for a short working week. Nordic supply is expected as issuers in the region emerge from blackout, however.

While a deal from Bank of Montreal was anticipated, after the issuer yesterday (Monday) announced the mandate, France’s Compagnie de Financement Foncier (CFF) caught several syndicate bankers unawares with its transaction — “out of the blue”, said one — although they said it was in line with the CFF’s plans to issue more regularly again.

CFF had been out of the market for over a year before it priced a Eu1bn five year at 16bp over in early March.

Leads Deutsche, Natixis, Nykredit, Santander and UBS went out with initial price thoughts (IPTs) of the mid-30s over mid-swaps for today’s 10 year obligations foncières issue for CFF and then set guidance at the 33bp over area (plus/minus 1bp), with indications of interest having reached Eu1.3bn. A lead syndicate banker said the final order book comprised more than Eu1.6bn of orders from nearly 200 accounts, with the spread fixed at 32bp over.

He said that the deal is part of CFF’s ongoing funding plan, with the issuer having been keen to tap the long end of the curve and conditions conducive for such a move.

“There has been good long end demand in secondary, and curves have flattened from seven to 10 years,” he said. “The issuer is capitalising on that demand and tighter spreads.”

A tightening of French government bonds, which French covered bonds are following, was beneficial, he added, putting 10 year OATs at 24bp over mid-swaps and the pick-up over the sovereign therefore in the high single-digits.

The obligations foncières will pay a coupon of 2%, according to the syndicate official.

“It’s not much, but a lot of investors have been on the sidelines in expectation of yields rising and with the duration trade having been the pain trade of the first quarter they have been forced to re-assess,” he said.

He put the new issue premium on CFF’s new issue at 2bp-3bp, with secondary market levels for CFF 2022s and 2025s pointing to fair value of 28bp-30bp over.

A syndicate official away from the leads said that the issuer “got a good level” given low yields.

“French covered bonds are tightening and walking hand in hand towards French government bonds,” he said. “Considering this, alongside the extremely low yield – which I would not want to touch as an investor – I would say the issuer got a good level, and were I on that deal I would say ‘hip hip hooray’ because it was not set in stone that such a deal could be a success.”

The syndicate banker said that the deal did not offer much of a new issue concession, with CFF November 2022s trading at 26bp over and the extension of the curve to a 10 year maturity worth around 4bp.

“There is not much of a new issue premium associated with this deal, and the little that has been given has likely been done so to offset the low yield,” he said.

Like the lead syndicate banker, he noted that investors had been hoping for a rise in yields but that, with this failing to materialise, “they obviously felt that they needed to take the opportunity to put their money to work”.

BMO good despite Ukraine ‘weariness’

Bank of Montreal issued its first benchmark covered bond off a recently approved legislative programme today, a Eu1bn five year deal that is also its first issue since January 2012, when it sold a US$2bn (Eu1.44bn, C$2.2bn) five year.

Leads Barclays, Bank of Montreal, Commerzbank and HSBC collected more than Eu1.7bn of orders for the new euro benchmark that they will price at 9bp over. The new issue was initially marketed with IPTs of 10bp-12bp over before guidance was set at the 10bp over area.

The deal is the latest inaugural legislative benchmark from a Canadian issuer, after Bank of Nova Scotia made its debut at the end of March with a Eu1bn five year that was priced at 9bp over on the back of some Eu1.6bn of orders.

A syndicate official at one of BMO’s leads noted that the deal came flat to where BNS’s benchmark was priced.

“The deal has gone extremely well,” he added, “especially if you take into account the weariness in the market with ongoing troubles in Ukraine, and this followed a constructive investor feedback session yesterday.”

Syndicate officials away from the deal said it went well and that it was priced in line with their expectations.

“It wasn’t a massive result, but a fair result,” said one.

Another was slightly more positive, saying the level of demand was “a very good result”.