Berlin Hyp today (Tuesday) attracted some Eu1.4bn of demand for a Eu500m three year Pfandbrief that is the first negative-yielding benchmark euro covered bond, and Berlin Hyp’s Bodo Winkler said that both issuers and investors are having to cope with the historic interest rate environment.

After announcing the deal yesterday (Monday) afternoon, Berlin Hyp leads Crédit Agricole, Deka, JP Morgan, LBBW and UniCredit launched the Eu500m no-grow three year mortgage Pfandbrief with guidance of the 4bp over mid-swaps area, before revising guidance to the 2bp area plus or minus 1bp, will price within range, on the back of some Eu1.4bn of orders. The spread was then fixed at 1bp.

The deal was priced with a 0% coupon, a re-offer price of 100.488% and a yield of minus 0.162%.

“The book suggests that not very many people have been put off,” said a syndicate official away from the leads. “It’s a remarkable trade, but it has been coming.”

Syndicate officials noted that SSA issuers, such as EIB, have previously priced euro benchmark bonds above par.

While investors have previously been considered too reluctant to invest in negative-yielding covered bonds, the consensus that the European Central Bank will on Thursday announce an increase to its quantitative easing measures and that yields will be further depressed for a long time raised the likelihood that a negative-yielding covered bond would be feasible, according to Bodo Winkler head of credit treasury and investor relations at Berlin Hyp. He noted that covered bonds have already been privately placed at negative yields, including by Berlin Hyp, even if a public issue is a more ambitious exercise given that a private placement only requires one investor seeking a specific maturity.

“As investors don’t expect any improvement concerning interest rates in the near future, they perhaps now have a different view on shorter dated paper again,” he added, “and I don’t think that they want to buy long dated covered bonds for the rest of their lives.”

He said that issuers have also been forced to consider their options, and that the negative yielding zero coupon bond was the “logical next step” after Helaba last month issued a long four year Pfandbrief in the maturity that was the shortest that still offered a positive yield.

“What we witnessed during the last weeks and months was one maturity after another coming into negative territory,” he added. “For us as an issuer, it is important to be able to issue not only in the long end of the curve. Our cover assets are not all long dated and we want to avoid asset-liability mismatches in the cover pool, of course.

“So if this goes on and on, you would in future not even able to issue a seven year deal – and then an eight year deal, a nine year deal and so on. In the end, this is just the new environment, and somebody has to be the first to do a deal like this.”

Winkler said that he was confident that there would be sufficient demand for the benchmark, but that the speed with which orders were placed and the level of demand this morning was striking.

“We are really amazed by the success because it is always very exciting when you are the first with something, even if it is well prepared,” he said.

Although allocations were not yet finalised, Winkler said that a decent double-digit share of the book comprised asset managers – more than he had expected.

“That is quite a nice number for the first negative yielding covered bond,” he said. “It was also nice to see that in terms of regional distribution it is in line with our previous issuance.

He noted that German placement of around 70% and international distribution of some 30% compared with domestic placement of 68% on Berlin Hyp’s last benchmark, and that international demand was high relative to many other German Pfandbriefe.

Syndicate officials at and away from the leads said the deal offered a new issue premium of around 3bp, suggesting that Berlin Hyp had paid a slightly elevated premium versus recent Pfandbrief supply to compensate investors for the negative yield.

“We were able to set a final spread that was below the first guidance, reflecting good preparation and strong demand,” said Winkler. “In the end, this was something very new and our wish was clearly to get a very good deal done.”

“What is interesting is the pick-up against German Bunds,” he added. “While the yield will be towards minus 16bp, it is still about 40bp more than the German sovereign. Meanwhile, it is a little bit more attractive than the ECB deposit rate, so it is better to lend to Berlin Hyp at minus 16bp or so than to give it to the ECB and be charged minus 30bp.”

Syndicate officials away from the leads said the strong demand for the deal mean more negative yielding Pfandbriefe are likely to follow.

“It’s an encouraging start for these issuers,” said one. “Perhaps this is the new normal.”

Berlin Hyp’s Winkler said that the deal clearly opens the door to further supply.

“It is now obvious that a deal like this can be done, and can be done successfully. I feel that it is very good news for us and for other German issuers, but looking forward, if yields go further into negative territory, it might also be a positive message for international issuers as well.”

The ECB’s CBPP3 portfolio grew Eu1.903bn last week, a slight increase on the previous week’s Eu1.831bn on the back of an increase in issuance. Figures released yesterday afternoon showed settled and outstanding purchases under the third covered bond purchase programme increasing from Eu157.993bn to Eu159.896bn in the week to last Friday.

Some Eu4.875bn of CBPP3-eligible supply settled last week, of which analysts estimated that the ECB bought Eu1.3bn-Eu1.4bn. Assuming no maturities, this implies average daily secondary market purchases of around Eu100m-Eu120m, down from an average of Eu166m or less per day in the previous week.

Month-end figures also released by the ECB yesterday showed that as at 29 February 28.01% of the CBPP3 portfolio had been purchases on the primary market and 71.99% on the secondary. Analysts noted that the portfolio grew by Eu7.784bn in February, more than the Eu7.197bn of January.