NordLB priced the second tightest ever benchmark covered bond today (Thursday), attracting more than Eu1bn of demand for a Eu500m four year public sector Pfandbrief at mid-swaps minus 18bp and with a coupon of 0.025%, ahead of a debut from its Luxembourg subsidiary.

Leads BayernLB, HSH Nordbank, Natixis, NordLB and UniCredit began with initial price thoughts of the mid-swaps minus 15bp area, with the order book reaching the Eu500m target level within just 20 minutes, according to a lead syndicate official. Guidance was set at the minus 17bp area, before the books were closed at just over Eu1bn and the re-offer set at minus 18bp.

The spread is the tightest ever for a benchmark covered bond after minus 20bp achieved by Münchener Hypothekenbank with a Eu500m two year Pfandbrief in November 2012, and according to the lead syndicate official the new NordLB issue has the lowest every yield for a benchmark covered bond.

He said the issuer was happy with the pricing, adding that the deal offered no new issue premium.

“We have priced pretty much on our curve,” he said. “Some would say we priced through the curve, but I think we just about priced on it.

“To be honest, we could have done this even tighter,” he added. “But we already thought moving 3bp away from guidance was very good indeed and we didn’t want to overdo it.”

He said that while some limited orders were placed, the limits were ultimately removed on a majority of orders. The German central bank came late to the deal, he added, placing its bid only after the issuer’s targeted volume threshold had been exceeded and with a limit that was quickly removed. Another European central bank from outside the Eurozone also took part in the deal, he added.

Investors from Germany and Austria took 90.4%, France 4%, the Nordics 2.4% and others 3.2%. Banks made up 46.9% of the final order book, central banks 32%, asset managers 13.1% and corporates 8%.

A syndicate official away from the leads said the deal appeared to have gone well.

“It’s not exactly easy to figure out who is interested in buying bonds with such yields, but that’s the environment in which we are operating now,” he said. “It offers a 0.025% coupon. That’s the new world.”

Another banker away from the leads also noted that investors still seem to be comfortable with such low yields.

“It seems we haven’t seen the floor on how tight spreads can go,” he said.

A syndicate official away from the deal meanwhile queried whether there had been any coordination with NordLB Covered Finance Bank on the deal’s timing given that NordLB CFB is holding a European roadshow until 24 February ahead of an inaugural euro benchmark.

However, the lead syndicate official said the “opportunistic, rather than strategic” trade would highlight the potential of NordLB’s other project.

“We wouldn’t have done this now with, say, a senior deal, because that would have taken away potential interest from the other transaction,” he said. “But putting out a transaction which comes at the extreme tight end of our funding instrument curve does make a lot of sense.

“In general, if you have an issuer or an issuer group that has several entities to issue at their disposal in our view it makes sense in any circumstance to let the tightest one go first and then see what remaining demand is there that could be directed to somewhat higher yielding instruments from the issuer group. That is done by a lot of issuers that have these entities at their disposal, so I don’t see any contradiction in that.”

No other issuers have publicly mandated for covered bond issuance in the coming days, though a syndicate official said the pipeline is building.

“We have a number of Nordic names looking at the covered bond market, and some Austrians, too,” he said. “These two regions are where I would expect the next issue to come from.”