Swedbank attracted the most orders for a covered bond this year today (Wednesday), taking Eu2.9bn of orders for a Eu1.25bn five year while offering a slim premium, and bankers said the Swedish credit was ideally positioned to benefit from the return of real money accounts to the market.

Syndicate officials had noted that demand for new covered bonds had increased in recent issues from more modest levels in January, with issuance conditions seen as supportive, supply in other markets limited, and investors returning after widening spreads had boosted covered bonds’ relative value.

They said impressive levels of demand for a Eu1.5bn seven year cédulas for CaixaBank on Monday and a Eu1bn seven year OH for BPCE yesterday (Tuesday) confirmed this, but said each had offered elevated new issue premiums.

“We had a theme this week, which was that even though demand was increasing, good-sized deals could only be done at a price, with premiums on the rise,” said a syndicate official away from Swedbank’s leads. “Swedbank today has blown that theory out of the water.

“We thought it might struggle when we saw the initial price, but it’s a real blowout.”

Swedbank Hypotek leads BNP Paribas, Danske, LBBW, NordLB, Swedbank and UniCredit launched the five year issue with guidance of the 18bp over mid-swaps area, before revising guidance to 15bp plus or minus 1bp on the back of books “well above” Eu2bn. The price was then fixed at 14bp and the size at Eu1.2bn, with the book closing at Eu2.9bn pre-reconciliation.

The book is the largest of any euro covered bond issue so far this year, surpassing the Eu2.4bn of orders taken by BPCE yesterday.

A syndicate official at one of the leads said the deal benefitted from increasing investor participation in covered bonds, noting that demand for new issues had been increasing since the end of January, with real money accounts in particular returning to the market.

“This week feels like a turning point,” said the lead syndicate official. “We have many more investors looking at covered bonds now than earlier in the year – that is what is new – and it felt like Swedbank is exactly the name they wanted to see.

“This shows that if you come to the market with a really strong name and a AAA product that everyone can buy with a two digit spread over swaps, investors are very welcoming.”

Syndicate officials said takeaways from the new issue are limited to top tier issuers, and said not all names would benefit from the same level of demand.

“With a deal like this you have the whole market to work with – no one has any problems with lines for Swedbank,” said the lead syndicate official.

Some syndicate officials at and away from the leads said fair value for the new issue was 11bp, seeing Swedbank March 2022s at 12bp, mid, May 2021s at 10bp, and September 2020s at 9bp.

“It is a slimmer premium than most deals we have seen,” said the lead syndicate official. “This is probably name-specific – the next guy to come along might not be able to get the same – but it shows you don’t have to pay up massively.”

Other syndicate officials away from the deal said the concession was more limited, citing Swedbank September 2020s at 13bp, bid, and May 2021s at 12bp.

“That meant they started with a premium of 5bp or 6bp – which is the kind of premium most deals have been finishing with,” said one.

Before Swedbank’s new issue, syndicate officials had noted that recent deals suggest that investor demand is shifting further out the curve, after being focused in the five year part of the curve in January. They said this was because of falling yields, with the five year swap rate at 6bp today, down from 33bp at the start of the year.

“We were curious, given how absolute yields had dropped in recent days, how many investors would get involved in a five year deal,” said the lead syndicate official. “This shows is the spread that counts, not the falling absolute yield.”

Syndicate officials said that, in spite of Swedbank’s success, further issuance is likely to be focussed in the seven year part of the curve. Seven year issuance today offers a 25bp pick up in yield over five years, they noted.

“Five years are still an option, and still a good one, because you maximise the investor base that will look at your deal,” said a syndicate official. “However, with the five year swap rate having lost 25bp-30bp since the start of the year, the yields on these deals don’t look as attractive as they have done.

Another syndicate official agreed, suggesting that investors and issuers will increasingly favour the seven year maturity in the coming weeks.

“A couple of weeks ago we’d have been telling people to stick to fives,” he added, “but with yields where they are now, at 6bp in five years and in negative territory in four years, the seven year part of the curve looks like a good spot to be in.”

Syndicate officials noted that the covered bond pipeline had refilled somewhat this week, with Macquarie Bank and Hamburger Sparkasse set to go on the road this month, but were uncertain how many issuers had deals to do this week, with many in blackout periods.

Hypo Tirol held a global investor call on Monday to update investors about developments regarding the credit and the Austrian covered bond market, ahead of a potential euro benchmark issue, for which it held a roadshow at the end of September.

Syndicate officials at leads Barclays, Deutsche, Erste, LBBW and Société Générale said Hypo Tirol had said a deal may follow the call depending on investor feedback. A lead syndicate official said today that the Austrian issuer is watching the market.