Sabadell attracted Eu2.3bn of orders for a Eu1bn eight year cédulas today (Thursday), capitalising on attractive funding levels ahead of potential event risk and widening this month, according to bankers, and getting its deal done before attention turned to an ECB meeting this afternoon.

Banco Sabadell’s deal comes after an eight year cédulas for Caja Rural de Castilla-La Mancha on 19 May. Spanish supply, and peripheral supply overall, had before then been limited, with the last previous benchmark cédulas having been a Eu1.25bn seven year for BBVA on 8 March. Banca Popolare di Milano meanwhile yesterday (Wednesday) reopened the Italian market with a first benchmark OBG since 23 March, a Eu750m seven year.

Sabadell announced a mandate for its eight year euro benchmark cédulas hipotecarias yesterday, and leads Barclays, Crédit Agricole, Commerzbank, Lloyds and Nomura launched the deal this morning with initial price thoughts of the high 40s over mid-swaps.

Guidance was then set at 40bp-45bp, will price within range, before the spread was fixed at 40bp and the size at Eu1bn. The book closed at Eu2.3bn, pre-reconciliation.

“It’s a very good print,” said a banker away from the deal, “but I don’t think it’s too surprising that they have been able to tighten from the high 40s to 40bp, given the big demand for peripheral paper with scope for performance.

“But for Sabadell, it is very good that they were able to get it done swiftly in this narrow window they had ahead of the ECB this afternoon.”

Some syndicate officials at and away from the leads said the deal offered no new issue premium, while others said it offered at most 3bp, with each camp citing the issuer’s November 2021s at around 32bp, bid.

They noted this was in line with the premium offered by Banca Popolare di Milano’s seven year OBG yesterday.

“It shows just how red hot this market still is, with even peripherals only having to offer the most fractional of pick-ups,” said one.

Bankers noted that Sabadell’s new issue had been priced through the level at which Castilla-La Mancha’s June 2024s were trading, at around 44bp, bid – it had been priced at 53bp two weeks ago. They said, however, that Sabadell tends to trade inside Castilla-La Mancha because it is a larger and more frequent issuer, even though the cédulas hipotecarias of both are rated Aa2 by Moody’s – Sabadell’s issuance also has an AA rating from DBRS.

Bankers said the demand received by Sabadell could encourage other Spanish issuers to tap the market ahead of a Spanish general election on 26 June.

They said current funding levels also look attractive for peripheral issuers after a substantial compression of covered bond spreads, but noted that spreads could soon widen on the back of event risk later this month – also relating to the possibility of a Fed rate hike, the UK referendum on its EU membership on 23 June, and the announcement of bidding results for a new series of TLTROs on 24 June.

“It is a very tempting time for these guys, who have been fairly quiet all year, to get deals done,” said a syndicate official. “But they might not have long.”

Analysts at Citi noted that, according to market indices, euro-denominated European benchmark covered bonds currently trade within a spread range of only 45bp, which they noted is the most compressed the market has been since February 2008.

“We fail to see scope for strong upside potential for further strong spread compression, in particular as on the one hand tighter spreads were largely driven by Eurosystem activism and on the other hand we think that in June markets will face several headline risks,” said Michael Spies, covered bond and SSA strategist at Citi.

“In most cases, we think a positive outcome will be spread-neutral while a surprising outcome could lead to wider spreads.”

Bankers said this afternoon’s ECB meeting is not expected to have a substantial impact on the covered bond market, but said further benchmark supply is unlikely this week.

“It’s all eyes on Draghi now, so we’ll take it from there,” said one.