Caisse Française de Financement Local (Caffil) braved volatile market conditions to sell a Eu500m 15 year covered bond today (Wednesday), attracting around Eu600m of demand to the long-dated transaction in spite of renewed movements in yields that had appeared to have stabilised.

Rates volatility has persisted since a back-up in yields followed Trump’s win in the US, contributing to spreads widening in covered bonds last week, but a syndicate banker at one of Caffil’s leads said that yields had stabilised in the past two days, suggesting that the issuer – which prefers longer dated issuance and had been monitoring the market for a long-dated opportunity – could approach the market today.

“We had seen that in general markets clearly were less supportive of the longer end, so it was a question of picking the right timing for a 15 year,” he said. “We then saw markets moving sideways this week, especially the OAT curve, which was the biggest reference for us.

“We needed to make sure the relative value versus OATs was right.”

OATs have underperformed recently, with French covered bonds remaining more expensive versus their sovereign than issuance from other countries. They have also seen large intra-day swings and the lead bankers said that pricing therefore needed to take into account possible market moves – without the issuer having to pay up too much versus its curve.

Leads Deutsche, HSBC, ING, LBBW and Natixis went out for a provisional Eu500m deal size with guidance of the 18bp over mid-swaps area. This compared with May 2031 OATs at 9bp and Caffil January 2031s at 8bp, mid. A Eu500m deal was then re-offered at 17bp over, with the books at around Eu600m and including some 23 accounts.

The leads put the new issue premium at around 5bp, while a banker away from the leads put it at 7bp, based on fair value of 10bp over. The ultimate pick-up over OATs was close to 1bp. The lead banker said the new issue premium compared favourably with that paid by Crédit Agricole on a Eu1.5bn seven year benchmark on Tuesday of last week.

Caffil’s outcome was achieved against the backdrop of a renewed sell-off in government bonds, which was attributed to the European Central Bank announcing moves to ease pressures in the repo market by lending out more securities.

“In the end, it is a fairly decent deal,” said the lead banker, “a good result in this market. But it shows the state of the market.

“It was not a straightforward trade as there was a level of uncertainty beforehand as to who would buy in this market.”

Photo: Caffil offices