Deutsche Hypo tapped by Eu250m a Eu500m February 2023 Pfandbrief today (Friday), with investors showing no sensitivity to the negative yield on offer, according to a lead banker, as orders quickly topped Eu1.3bn, raising the prospects of opportunistic issuance after a series of successful taps.

Since the reopening of the market after the UK’s vote to leave the EU on 23 June, euro covered bond supply has been dominated by German issuers. Commerzbank on 4 July sold the only new euro benchmark since the referendum, a Eu750m eight year issue. On the same day, MünchenerHyp tapped by Eu250m a Eu500m April 2026 issue, before Commerzbank returned to the market on Tuesday to double in size a June 2026 issue to Eu1bn.

After announcing a mandate for a Eu250m no-grow tap yesterday (Thursday) afternoon, Deutsche Hypothekenbank leads BayernLB, Crédit Agricole, DZ, HSBC and NordLB reopened the February 2023 mortgage Pfandbrief at 9:00 CET this morning with guidance of the 4bp through mid-swaps area. The spread was then, at 9:30, set at 7bp through, on the back of books over Eu900m, including joint lead manager interest, before the book closed at over Eu1.3bn, including JLM interest, at 9:45.

The original Eu500m issue was priced in February at 1bp through mid-swaps. Syndicate officials at and away from the leads said the tap offered no premium, seeing the deal quoted at minus 7bp, bid, pre-announcement.

“It was priced on the bid side of the bond, with the issuer essentially paying nothing extra to increase the deal, all while taking books more than five times subscribed,” said a syndicate official at one of the leads. “We clearly gained very strong momentum, and this went really, really well.”

The deal had a 0.25% coupon and a re-offer price of 102.161% to yield minus 0.0771%.

“There was literally no sensitivity in the book to either the negative yield or the tightening of the spread,” said the lead syndicate official.

Berlin Hyp sold the first and to date only negative-yielding benchmark euro covered bond in March, a Eu500m three year Pfandbrief that was priced at 1bp over mid-swaps, and had a 0% coupon and a yield of minus 0.162%.

Since Berlin Hyp’s deal, some issuers have cited difficulties in attempting to print a negative yielding benchmark, preferring instead to launch longer dated deals that offer more yield or opt for other currencies, or to look at alternative funding options like TLTRO II for shorter dated funding.

“This is just a tap, but it’s a reminder that investors are OK with negative yields in covereds if there’s something still something in it for them,” said a banker.

The lead syndicate official said the deal had benefitted from the build-up of demand after the recent lack of supply, and said the leads had more leverage to tighten the spread as the deal’s size was limited from the beginning, unlike the recent taps for MünchenerHyp and Commerzbank.

Bankers said the deal also looked attractive given the pick-up of some 40bp it offered versus tightening Bunds.

“This has been the key to these recent German deals,” said another syndicate official. “The appetite for lower beta paper is high, and Pfandbriefe look almost generous next to where some Bunds are trading.”

Covered bond supply in other currencies besides euros has also been limited since the Brexit referendum and in the run up to summer, as Santander UK sold the only sterling benchmark on 1 July, a £500m (Eu596m) three year issue, and MünchenerHyp the only dollar US dollar benchmark, a $600m (Eu540m) three year on Tuesday.

“There is bit of a feeling of déjà vu this week,” said a syndicate official. “For the second week, Commerzbank and MüHyp sold successful deals but no one was really encouraged to follow.

“Issuers are a combination of well-funded, in blackout periods, or reluctant to enter the market before the summer.”

However, some syndicate officials said more supply could follow in the next couple of weeks, before the summer holiday period begins in earnest.

“The last few deals were good, but Deutsche Hypo’s was very fast, and most of all straightforward,” said one. “I think it could set us up for more opportunistic trades in the next week or two.”

Bankers also noted that market conditions could be much less supportive after the summer break, given the potential for political headlines surrounding the UK’s negotiations to leave the EU and the US presidential election to cause renewed uncertainty.

“In contrast, next week looks a fairly good window, except for an ECB meeting on Thursday,” said one. “I don’t think we’re done yet.”