Caffil priced a Eu1bn nine year covered bond on the back of Eu1.25bn of orders today (Tuesday), and bankers said the result is more encouraging than a Stadshypotek deal yesterday, but that this was due in part to the CBPP3 bid, and were pessimistic about the prospects of further issuance.

Sweden’s Stadshypotek yesterday sold a Eu1bn six year issue that was only just subscribed. Bankers said the reception was muted because of a deteriorating market backdrop, with increased uncertainty over the Brexit referendum, and because its spread was the lowest on a non-CBPP3 eligible benchmark this year.

“We were surprised by the market yesterday,” said a syndicate official. “We expected a continuation of the muted risk-off mode that the market settled into last week – yields are very low, the market is suffering from Brexit headlines – and conditions are fragile overall, but in terms of covered bonds I still expected the market to be more supportive.”

Caisse Française de Financement Local (Caffil) leads BNP Paribas, Crédit Agricole, Nomura, Société Générale and UniCredit launched the public sector obligations foncières at 9:00 CET today with guidance of the 6bp over mid-swaps area. The spread was then fixed at 4bp and the size set at Eu1bn at 11:10 CET, on the back of books around Eu1.25bn.

“All things considered, it’s a decent result,” said a banker away from the leads. “In these conditions, you can’t take a comfortable Eu1bn issue for granted, especially at these tight levels.”

The new issue is the tightest-priced benchmark French covered bond in any maturity since last October – when CFF priced a Eu1.25bn five year issue at 2bp over mid-swaps – and the tightest with a maturity of nine years or longer since September – when Caffil priced a Eu1bn 10 year issue at 3bp.

Bankers have noted that in recent weeks French covered bond spreads have compressed to trade at a record tight to German Pfandbriefe, and said the sector looked increasingly expensive.

Syndicate officials away from the deal said Caffil’s new issue seemed to have gone more smoothly than Stadshypotek’s deal, which was launched with initial guidance of the 4bp area before being priced at 3bp.

However, some attributed this mainly to the French deal’s eligibility for the ECB’s covered bond purchase programme.

“I think the ECB was the difference here,” said one. “If you take out the ECB clip, I doubt they’d have a fully subscribed Eu1bn issue on their hands.”

Some syndicate officials also suggested that Caffil’s deal presented a new issue premium equal to or larger than Stadshypotek’s. Seeing Caffil 2025s at minus 1bp, mid, the syndicate officials said Caffil’s deal offered a new issue premium of 5bp, compared to 4bp-5bp for Stadshypotek’s deal.

“If they’re paying more premium to get this done than a non-ECB eligible deal, that’s pretty counterintuitive,” said one.

However, other syndicate officials said this was appropriate, given the longer maturity of Caffil’s benchmark.

Bankers also said the slightly higher demand for Caffil’s new issue could be explained by the deal’s longer maturity, which allowed the issuer to price with a coupon of 0.375%, compared to the 0.05% offered by Stadshypotek’s six year.

10 year Bund yields fell below 0% for the first time this morning, hitting a low of minus 0.03%.

“In this low yield – or no yield – world, any extra helps,” said a banker.

However, syndicate officials were uncertain about the prospects of further issuance this week, given the potential for issuance conditions to further deteriorate as a number of potential risks draw closer – including the UK referendum on EU membership on 23 June.

“Caffil showed deals can be done at a certain price, in the right maturity, and with the help of the ECB – but for how long?” said one.

Another banker agreed.

“To be honest, my advice now is to sit tight and see what happens with Brexit,” he said. “The market’s overdone, conditions are getting worse, and it’s time for a break.”