LBBW is set to sell a three year US dollar Pfandbrief tomorrow (Tuesday), with bankers highlighting favourable arbitrage on offer versus euros. The pace of issuance in euros is meanwhile expected to continue a recent slowdown, with the pipeline cleared and many issuers in blackout.

Landesbank Baden-Württemberg announced a mandate this (Monday) afternoon for the three year public sector Reg S benchmark, via leads Citi, Credit Suisse, LBBW and RBC. Bankers at the leads said the deal will be launched tomorrow, subject to market conditions.

The leads cited as comparables LBBW’s May 2019s, seen at 32bp, mid, and 2019 dollar-denominated paper from fellow German issuers NordLB, Aareal, MünchenerHyp and BayernLB, quoted between 31bp and 37bp.

Bankers said that the new US dollar issue could offer LBBW a substantial saving versus an equivalent euro trade, noting that LBBW’s euro-denominated January 2019s are trading at minus 17bp, mid, which they estimated to be equivalent to a dollar spread of around 39bp.

“Of course, the dollar market also offers issuers such as LBBW a rare opportunity to secure three year funding in the covered space, as any three year euro trade would be priced deeply in negative territory,” added one.

The deal will be the first new US dollar benchmark covered bond to be issued out of Germany this year and the third overall since the market opened, following two $1.75bn five year issues for Bank of Montreal and Toronto-Dominion on 11 and 18 January, respectively.

Deutsche Pfandbriefbank sold the last benchmark dollar Pfandbrief in August, a $500m August 2019 issue that it tapped by $100m last Tuesday, at a spread of 55bp over mid-swaps.

The euro market is meanwhile expected to continue a gradual slowdown that has seen issuance fall week-on-week since the start of the year, with bankers anticipating around three benchmarks this week.

“That’s mainly a function of the fact that we’re in the peak of the blackout season right now, rather than there being anything untoward with the market,” said a syndicate banker. “Fundamentals are still working in favour of issuers and all of last week’s deals went well, but the last round of issuance cleared out many of the issuers that were still in the pipeline.”

Last week euro benchmark supply totalled Eu4.25bn across five deals, the last of which came on Wednesday. This represented a fall from Eu5.75bn in the previous week and Eu12.5bn in the first week of the year.

Although a handful of issuers are said to be monitoring the market ahead of potential deals this week, syndicate bankers said the pool of prospective issuers is small given the rollout of blackout periods and the rush of activity at the start of the month.

“Many issuers have either already issued something or are already well funded, so there are few obvious candidates,” said one. “Of the countries that you would normally look to but have so far been quiet, UK names have an attractive alternative in the Bank of England’s Term Funding Scheme, and the Italians will probably keep a low profile for now given the challenges in the banking sector, and issuers from Australia and New Zealand may prefer other currencies or wait for changes in cross currency swaps.”

Some Eu22.5bn of euro benchmark covered bonds have been sold so far this month, compared with Eu20.5bn over the same period last year. Last year, January ended with some Eu24.25bn of supply. This month’s total is expected to be higher, albeit not by a substantial amount.

“Net supply is currently slightly positive at Eu2bn, but around Eu8bn of euro benchmarks will still mature before the end of the month, which could push net supply into negative territory,” added Joost Beaumont, senior fixed income strategist at ABN Amro.