Landesbank Baden-Württemberg tapped a June 2018 mortgage Pfandbrief for Eu250m at 22bp through mid-swaps this (Monday) morning, opening a new front in central bank buying for CBPP3 that bankers said could result in more crowding-out of other investors.

Leads Crédit Agricole, HSBC, ING and LBBW announced the Eu250m no-grow tap of the Eu600m 1.375% June 2018 issue with guidance of the mid-swaps minus 22bp area and fixed the level at minus 22bp. Syndicate officials at the leads said that the level was in line with the mid level of price indications for the bond in the secondary market.

LBBW tapped the bond for Eu100m in May and the original Eu500m issue in May 2012 was its last euro benchmark, excluding a Eu500m 15 month Pfandbrief sold in February.

“The bank is in a very comfortable liquidity position,” said a syndicate official at one of the leads, “but the spread was a bit too tempting.”

He said that there was a reverse enquiry for the issue at the eventual pricing level and the issuer decided to act on it, adding some additional demand from the market.

The reverse enquiry is understood to have come from the Bundesbank, which a banker away from the leads noted had not led any Eurosystem CBPP3 buying in the primary market given that there has been no German issuance since the programme began and that CBPP3 purchases are channelled through the respective national central bank.

The banker said he doubted that there was little demand beyond CBPP3 given a pick-up over the reference OBL of 7.2bp and pricing flat to KfW. The lead syndicate official acknowledged that the pricing was “not everyone’s cup of tea”, but said that there had been some complementary demand from Asia, while another cited bank treasury and fund manager buying.

“We put the price where we think resistance was,” said the second lead syndicate official. “We have definitely found where the bottom is in Pfandbriefe.”

He said that the leads knew from the start that a larger size, of perhaps Eu500m, would not have been possible.

Syndicate bankers said that other issuers could follow LBBW’s example and also tap tight issues.

“It’s effectively very cheap money for issuers if they have bits and pieces they want to do,” said one.

However, he said that it raised the possibility of CBPP3 stymieing other activity in the covered bond market – something that market participants have said has so far been relative restrained, in terms of volumes, given that Eurosystem participation in new issues appears to have been limited to under 25% of deals.

“This would see precisely the crowding-out scenario that had been feared kicking in,” said the banker, “because you would only have central banks for these artificially tight issuances.”

Another agreed that this was a threat, with pricing only depending on “just how hard issuers want to play it”.

The European Central Bank will this afternoon announce how much it has bought under CBPP3 as of last Friday. Last Monday’s figure was Eu4.779bn. That comprised only secondary purchases, but today’s figure should capture any CBPP3 buying of Nordea Bank Finland and Credito Emiliano benchmarks that had settled by Friday.

The primary market was otherwise quiet, with public holidays in several countries tomorrow (Tuesday). Syndicate bankers spoken to by The CBR said that there were no concrete deals in the pipeline.