DG Hyp sold a twice oversubscribed Eu500m short 10 year Pfandbrief today (Wednesday) that continued a return of German supply facilitated by improved relative value, according to bankers, with the issuer sating yield-hungry investors amid falling rates – although new zero coupon supply is deemed possible.

Fellow German issuer Deutsche Hypothekenbank yesterday (Tuesday) sold a Eu750m eight year issue that is its largest Pfandbrief since 2011, attracting over Eu1.4bn of orders, after limited German supply in April.

DG Hypothekenbank leads Commerzbank, Crédit Agricole, DZ, NordLB and WGZ launched the Eu500m no-grow March 2026 mortgage Pfandbrief at 9:00 CET with guidance of the flat to mid-swaps area, before fixing the spread at minus 2bp. The book closed at 10:15 and stood at over Eu1.1bn post-reconciliation.

“It’s a good deal all round,” said a syndicate official at one of the leads. “It’s a longer deal than we saw yesterday and at a tighter price, which is a good result – and appropriate given DG Hyp’s better rating.”

DG Hypo’s covered bonds are rated AAA by S&P, while Deutsche Hypo’s are rated Aa1 by Moody’s.

Syndicate officials said fair value for the new issue was around minus 6bp, seeing DG Hyp May 2024s – the issuer’s longest dated outstanding – at minus 8bp, bid, and 2025-2026 paper from MünchenerHyp and WL Bank at minus 6bp-5bp.

“That’s more premium than we’ve seen on recent deals, but this longer-dated stuff tends to be a bit more expensive,” said a banker away from the leads. “It’s a good level, and coming only modestly back from MünchenerHyp’s curve is a good result for DG.”

The lead syndicate official said that DG Hyp opted to tap the long end because that is where demand is strongest.

“This part of the curve has been especially undersupplied, and investors are keen for anything with a bit of yield, so these maturities make sense,” he said.

Rates have continued a recent fall this week, with the 10 year Bund yield at 0.11% this morning, down from 0.22% at last Wednesday’s close, and Bunds up to nine years currently trading at negative yields.

DG Hyp’s new issue was priced with a coupon of 0.375% to yield 0.489%. Deutsche Hypo’s eight year yesterday came with a coupon of 0.25% and a yield of 0.294%.

Another syndicate official said, however, that the depth of demand in the market meant that German issuers could successfully re-enter the short end of the curve to print zero coupon on negative yielding Pfandbriefe.

Berlin Hyp on 8 March sold the first and to date only negative yielding benchmark euro covered bond, a Eu500m three year Pfandbrief that had a 0% coupon and a re-offer price of 100.488% to yield minus 0.162%. This came after Helaba on 16 February sold the first 0% coupon benchmark, a Eu1.25bn long four year with a yield of 0.025%.

“You can cut it both ways,” he said. “With rates where they are it is a good time to do these longer-dated deals for those investors who need to pick up some yield.

“But likewise, while there is so much cash out there, there are investors that are looking for the shorter durations to park that cash at levels that are still relatively better than they can get in govvies or depositing it, and that makes those zero coupon or negative yield trades possible.”

On Tuesday of last week, while rates were higher, an LBBW Eu750m long five year Pfandbrief was priced at 4bp through mid-swaps with a coupon of 0.05%.

Bankers added that the return of Pfandbrief supply had come on the back of an improvement in relative value versus government bonds, with DG Hyp seen offering a pick-up of around 30bp versus Bunds and Deutsche Hypo of around 40bp – which they said made the deals especially attractive for bank treasuries’ LCR portfolios.

Banks were allocated 52.3% of Deutsche Hypo’s deal, central banks 28%, fund managers 17.4%, insurance companies 1.1%, and others 1.2%. Accounts from Germany took 78.7% the Benelux 6.4%, the Nordics 4.7%, Switzerland 2.7%, the UK 2.1%, France 1.7% and others 3.7%.

“We are excited about the broad investor base that emphasizes again the great appeal of our Pfandbrief,” said Andreas Pohl, speaker of the Board of Managing Directors at Deutsche Hypothekenbank. “We have experienced once again that our investor relations activities pay out.

“Many of the institutions visited during roadshows and individual investor meetings were significantly present in the order book.”

The deal was Deutsche Hypo’s second benchmark covered bond of the year, following a Eu500m seven year issue in February. The issuer said it plans to raise Eu4.5bn through wholesale funding this year, also including issuance in senior unsecured and registered bonds.