Stadshypotek sold a Eu1bn six year issue today (Monday) that was only just oversubscribed, and syndicate officials attributed the muted response to the spread being the lowest on a non-CBPP3 eligible benchmark in a year and to general market uncertainty, notably ahead of the Brexit referendum.

Bankers last week forecast that the flow of euro covered bond issuance would become more irregular this week, on the back of increased event risk – related to an FOMC policy meeting this Wednesday and next week the UK referendum on EU membership on 23 June, the announcement of the take-up of a new series of TLTROs on 24 June, and a Spanish general election on 26 June.

Bankers also said that supply could be negatively affected by the prevailing low yield environment – noting that 10 year Bund yields were today at 0.01% and had been hovering above zero last week.

However, market participants were still optimistic that conditions would remain supportive for covered bond issuance following a series of positive results, and said narrow windows would continue to offer opportunities.

“Last week I was bullish, and at first I had big hopes for Stadshypotek’s deal, but it seems the market is not as strong as we all thought it would be today,” said a banker. “The deal is getting done, but it is clearly one of the more underwhelming recent responses.

“We have been saying for weeks that covered bonds have been resilient to these risks, but apparently we are now working with lesser dynamics.”

Stadshypotek leads BNP Paribas, Credit Suisse, Deutsche, HSBC and Svenska Handelsbanken (Stadshypotek’s parent) launched the six year issue with guidance of 4bp at around 9:20 CET this morning – skipping initial price thoughts to move ahead quickly, according to a banker at one of the leads. At 11:45 the spread was then fixed at 3bp on the back of books in excess of Eu1bn, including lead manager interest.

Syndicate officials away from the leads said the response was underwhelming, noting that the book had developed slowly and that the 1bp of movement in the spread is less than had been observed in most recent trades. They also noted that the deal attracted more limited demand than Stadshypotek’s previous benchmarks. The new issue is Stadshypotek’s smallest euro-denominated benchmark issue since a Eu1bn seven year in October 2013, with each of its four euro benchmarks since sized at Eu1.25bn.

“The starting point looked sensible,” said a banker away from the leads. “It meant they would not be pricing this at a negative yield, and if they had been able to tighten the spread by the usual 3bp then this would have offered a 3bp concession, which is fairly in line with the last weeks.

“But with so many headlines giving cause for concern, maybe some opportunistic investors that had been driving books are now being more cautious, and maybe others need a bit more spread on the table.”

Covered bond spreads across all jurisdictions have compressed in recent weeks, and bankers noted that Swedish spreads in particular had outperformed core and other non-Eurozone jurisdictions.

“Perhaps the spread compression we have seen between non-Eurozone and Eurozone covered bonds has also just become too much for investors, who do not feel like the spreads of the last weeks are compensating them enough for this increased risk,” said a syndicate official away from the deal.

The new issue is the tightest-priced euro-denominated benchmark covered bond from Sweden since June 2015, when SCBC priced a June 2022 issue at 2bp over mid-swaps.

A syndicate official at one of Stadshypotek leads said the deal had gone well given the Swedish issuer is not supported by the ECB’s covered bond purchase programme.

“To get a yard done in this market for this issuer is a strong message,” he said. “It’s fair to say the market isn’t great, but we collectively took the view that it was better to go ahead.

“There’s no upside to waiting – with more polls coming out on Brexit, there’s only more downside and the market is only going to get more jittery.”

Another syndicate official at one of the leads said the deal had gone well considering the yield and spread on offer, noting that it is the tightest-priced non-CBPP3 eligible benchmark of the year.

“That puts it in perspective,” he said. “Yes, it was a little slow, but if you factor in the yield and spread this deal offered I think it is quite a remarkable result.

“We’re pricing this just a few basis points back of comparable CBPP3 eligible paper, so you’re not going to get a two or three times oversubscribed book. Some accounts will think it is too expensive, but we didn’t need them.”

The new issue was priced with a 0.05% coupon. Only German issuers had previously issued benchmarks with coupons of 0.05% or less this year.

Syndicate officials said Stadshypotek’s deal offered a new issue premium of around 4bp, seeing Stadshypotek February 2023s at 0.5bp, mid, and 2021s at minus 3bp-2bp. They also cited 2022 paper from Swedbank, SBAB and SEB at minus 2bp, minus 0.5bp, and plus 0.5bp, respectively.

Bankers noted that the premium is larger than those offered by recent non-Eurozone, non-peripheral issues, and said similar issuers would now also have to pay up and offer premiums of 4bp-5bp.

“Eurozone issuers will still follow slightly different dynamics, but for rich non-Eurozone markets this is a new data-point to deal with,” said one.

Denmark’s BRFkredit will tomorrow (Tuesday) complete a European roadshow ahead of a potential euro-denominated benchmark covered bond.

Bankers said that another two or three issuers are monitoring the market this week and considering launching euro benchmarks. They said these issuers might be persuaded to stay out of the market given the weaker tone, but said deals could still be done at the right price and with the right maturity.

“The Nordics tend to not go so long, for their own reasons, but I think a 10 year trade would have fared better today,” said one. “For a core Eurozone name I would now recommend something in the 10 year part of the curve, to offer a bit more yield.”

Another syndicate official agreed.

“Duration is still fairly well bid, and I think deals can be done in that seven to 10 year part of curve,” he said. “The market is not closed.”