LBBW used a slim window to attract Eu1.5bn of orders for a Eu500m six year Pfandbrief today (Friday) with a limited premium, moving quickly before the potential return of Asian-led volatility and ahead of competing supply. ApoBank is marketing a potential euro benchmark.

LBBW’s new issue is the first benchmark covered bond since Thursday of last week (4 February), with supply having dried up amid volatility in the wider markets.

However, with equities up 1.5%-2% across Europe this morning and credit indices stable, syndicate officials said conditions looked supportive, after volatility had struck once again yesterday, with falling stocks erasing earlier gains.

“Yesterday was horrific, whichever way you look at it,” said one syndicate official. “Things looked bright on Wednesday but then on Thursday stocks lost everything they had just gained.

“However, today began much more supportive.”

Landesbank Baden-Württemberg leads Crédit Agricole, Erste, LBBW, Société Générale and UBS launched the Eu500m no-grow six year mortgage Pfandbrief with guidance of the flat to mid-swaps area, before revising guidance to 2bp through, plus or minus 1bp, on the back of books over Eu1bn. The deal was then re-offered at minus 3bp, with the book closing at Eu1.5bn, comprising over 50 accounts.

The deal is LBBW’s second benchmark covered bond of the year, following a Eu750m four year on 5 January.

“We are happy with this outcome,” said a syndicate official at one of the leads. “Obviously the markets have been volatile, but Friday offered a small window and we thought that this kind of risk-off trade would do well.

“This result shows not only that we were right, but also the resilience of this market. Covered bonds are the last man standing.”

Syndicate officials away from the leads agreed that the outcome is encouraging.

“It’s an absolutely fantastic trade,” said one. “It proves how much cash is out there and it shows how strong the covered bond market still is.”

Syndicate officials noted that the deal had progressed quickly, with the leads announcing the deal at 9:40 CET and with the book closing at 10:45.

The lead syndicate official added that the deal appeared relatively late on screens because the issuer and the leads had taken longer than is usual to assess the market.

“The market was pointing in the right direction, but we felt it was still a mixed bag,” he said. “We have seen this week how a period of stabilisation on Wednesday quickly turned to a risk-off tone yesterday, so we thought it was best to see how conditions developed.

“In the end it was better to go today as you never know how markets will react when mainland China returns to the office next week, and on the other hand, if we have more stability then you get the sense there will be a good number of issuers looking to tap the market.”

Syndicate officials at and away from the leads said fair value was around minus 6bp, seeing LBBW January 2020s at minus 8bp, mid, October 2021s at minus 6bp and August 2022s at minus 7bp.

“That is slightly less than the premiums paid by other comparable Pfandbriefe this year, which paid 4bp-5bp,” said the lead syndicate official.

The new issue was priced with a coupon of 0.125%.

Syndicate officials had earlier in the week said that the five year part of the curve was closed to German issuers after a tightening in yields. However, syndicate officials said that a five year Pfandbrief from LBBW could today have been priced with a positive yield after the five year swap rate backed up slightly this morning, but said that the shorter end of the curve will likely remain difficult for German issuers.

“The six year offered bigger pricing power,” said the lead syndicate official. “You might have been able to do a five year deal without going into negative territory, but I doubt you could have tightened the spread by 3bp considering the all in yield.”

“Maybe six years are the new five years.”

Maureen Schuller, head of financials research at ING, noted ahead of the LBBW trade that over two-thirds of German covered bonds are currently quoted with negative yields.

“This, in our view, will continue to support a seven to 10 year maturity primary focus by covered bond issuers from this market,” she said.

Schuller added that 32% of bonds on the Markit iBoxx euro covered index are quoted at a negative yield, the highest percentage ever.

Syndicate officials said that LBBW’s result should encourage other issuers to enter the market next week, if wider market conditions remain stable.

“This is the deal we needed to get things started again,” said one.

Deutsche Apotheker- und Ärztebank (apoBank) yesterday announced a mandate for investor meetings “in the coming weeks” ahead of a potential euro benchmark Pfandbrief issue. Commerzbank, DZ, NordLB, UniCredit have the mandate.

The German issuer on 4 November launched its first benchmark Pfandbrief since 2008, selling a Eu500m long five year issue.