WL Bank tapped a Eu500m January 2030 issue by Eu250m today (Thursday), reopening the deal at a minimal new issue premium, as bankers said demand for Pfandbriefe is at its highest level so far this year, despite low yields, with the German product having “rarely looked cheaper” on a relative basis.

German banks have been the only issuers to tap the euro benchmark covered bond market this week, with DG Hypothekenbank selling a Eu500m short 10 year issue yesterday (Wednesday) and Deutsche Hypo a Eu750m eight year on Tuesday.

This morning Westfälische Landschaft Bodenkreditbank leads BayernLB, DZ, LBBW, and UniCredit reopened the January 2030 mortgage Pfandbrief at 5bp over mid-swaps, in the middle of guidance, to increase the Eu500m issue to Eu750m.

The deal, which was priced at 1bp through mid-swaps in January 2015, was quoted pre-announcement at 2bp, mid.

“It is only a minimal pick-up versus the secondary,” said a syndicate official at one of the leads.

Bankers noted that, in spite of minimal new issue premiums and the low yield environment, demand for German Pfandbriefe has increased in recent weeks, with both bid-to-cover ratios and the average number of orders in May higher than in any other month this year.

Deutsche Hypo’s Eu750m deal was its largest covered bond since 2011, and attracted orders of over Eu1.4bn from 70 accounts. DG Hyp’s new issue, meanwhile, is the tightest-priced and most oversubscribed 10 year Pfandbrief so far this year, with the spread fixed at 2bp through mid-swaps and orders of Eu1.1bn, including 53 accounts.

“The successful issue of our second benchmark this year, together with the notable oversubscription, have once again demonstrated the high level of appreciation DG Hyp enjoys with investors as a premium issuer,” said Georg Reutter, chairman of DG Hyp’s management board.

Banks were allocated 45.6% of the deal, central banks and official institutions 30%, fund managers 19%, and insurance companies 5.4%. Accounts in Germany took 60.8%, the Nordics 12.2%, Asia 8%, Austria and Switzerland 5.8%, the Benelux 5%, the UK 3.4%, France 3%, the Middle East 1.5%, and Italy 0.4%.

“It is clear that this week’s deals have all gone very well,” said a syndicate official. “It is true for most jurisdictions at the moment, but German issuers in particular are not having the hardest of times.”

Bankers attributed this to a recent improvement in relative value.

Michael Spies, covered bond and SSA strategist at Citi, said Pfandbriefe “have rarely looked cheaper” versus the paper of core euro area peers, the German sovereign and German agencies.

“In our view, other core euro area covered bonds are trading at overly compressed levels versus Pfandbriefe and a step-up in quality seems increasingly reasonable,” he said.

French covered bonds’ spread to Pfandbriefe, mid-ASW, bp

Source: Citi Research

Citi analysts cited French obligations à l’habitat as currently trading just 2bp wider than Pfandbriefe, while yield spreads between Pfandbriefe and German sovereign bonds are at near historically wide levels.

“While we forecast 10 year Bund yields to range between 15bp and 20bp until the end of the year, Pfandbriefe would still provide a 35bp pick-up to the equally rated sovereign,” added Spies. “The main risk obviously is a further step-up of sovereign bond purchases by the ECB or higher than expected Pfandbrief supply in the near-term.”

DBR vs BYLAN in the 8yr sector, yield spread, bp

Source: Citi Research

Bankers said more German issuers will be encouraged to tap the market by this week’s deals, but that further benchmark covered bond supply this week is unlikely, while public holidays in Germany and other European countries on Monday should keep the market subdued until Tuesday.

“To be honest, I thought there would have been more this week,” said a syndicate official. “But, in financials, this week has been all about senior and subordinated markets, and corporates have really taken the limelight.”

Another banker agreed, but added that the relative lack of supply in covered bonds had allowed deals to perform.

“On the other hand, quite a few of the new issues in the corporate market have really struggled to perform under the weight of supply, while investors have just been trying to keep up,” he said. “As an investor, what would you prefer?”

Caffil on Tuesday tapped its Eu1.25bn April 2026s by Eu250m in an exercise that was prompted by reverse inquiries. Nomura was the sole lead.