The short end’s sway over new issues was in evidence this week as Nordea, Aareal and SpareBank 1 priced five year deals with barely positive yields and marginal NIPs on the back of burgeoning books, and funding officials cited the depth of demand and levels as a sign of the times.

The week kicked off on Monday with three issuers active in the euro covered bond market – Nordea Mortgage Bank with a Eu1.5bn five year, DBS a Eu750m seven year, and La Banque Postale a Eu500m eight year – and Nordea’s shorter dated deal was deemed the most resounding success of the three, priced at 4bp through mid-swaps with a coupon of 0.025% and drawing over Eu2.4bn of demand. The result highlighted investors’ increasingly clear preference for shorter dated paper, something that was taken on board by the next two issuers to come to market.

“We spent a while thinking about the maturity, but concluded that the five year part of the curve is the sweet spot, where demand is deepest,” Eivind Hegelstad, COO and head of investor relations at SpareBank 1 Boligkreditt, told The CBR. “It’s a sign of the times.

“We’re in an environment now where European economies are starting to perhaps turn a corner, where perhaps things are going to change in monetary policy, and where perhaps rates may start to go up again, at some point. People take that into consideration when they prefer shorter maturities.”

SpareBank 1 Boligkreditt leads Commerzbank, Crédit Agricole, DZ Bank and Nordea launched the deal on Wednesday morning with guidance of the 4bp over mid-swaps area, before revising guidance to the 2bp area and fixing the size at Eu1bn, with the books “well above” Eu1.5bn. The deal was then re-offered at flat to mid-swaps and the book closed at almost Eu2bn, pre-reconciliation.

The deal was priced with a coupon of 0.05% to yield 0.097%.

Hegelstad said the shorter dated deal had been made possible by a recent rise in rates, which enabled SpareBank 1 to price the deal with the slightly positive yield. For much of last year, short and even intermediate dated covered bonds from many jurisdictions traded in negative territory, and although some German issuers priced negative yielding benchmarks, most issuers preferred to move further out the curve.

“Also, if things start to move in the wrong direction with more negative rates later on then it would once again become difficult or fairly impossible for us to issue a five year,” Hegelstad added. “From that perspective, it’s good to get it done while you can and while rates in the five year segment are positive.”

The final order book was around Eu1.7bn with around 100 accounts. Banks were allocated 55% of the deal, asset managers 28%, central banks and official institutions 14%, and pension funds and insurance companies 3%. Accounts from Germany and Austria bought 45%, the Nordics 15%, the Benelux 12%, the UK and Ireland 8%, France 8%, Asia 5%, Switzerland 3%, and others 4%.

“We’ve very happy with the response from the market,” said Hegelstad. “It was as expected – we have a strong environment and we issued the right maturity.

“When we tightened the price to 2bp, demand was clearly over Eu2bn, which is very strong in my view.”

Hegelstad said some accounts had placed limits, many of these at 2bp, and subsequently dropped out of the deal, but that the books still justified the further tightening to the final spread of flat to mid-swaps, which was the unanimous advice of the four leads.

Also on Wednesday, Aareal leads Commerzbank, DekaBank, DZ Bank, LBBW and UniCredit launched the German bank’s July 2022 deal with guidance of the mid-swaps minus 5bp area, before fixing the spread at minus 8bp on the back of books over Eu1.3bn. The deal was priced with a coupon of 0.01% to yield 0.069%.

The final book stood at almost Eu1.5bn. Banks were allocated 43.5% of the deal, fund managers 30.5%, central banks and official institutions 23% and insurance companies 3%. Accounts from Germany bought 77.4%, Asia 15%, France 3.8%, Switzerland 3%, and others 0.8%.

“With nearly three times oversubscription and more than 60 participating investors, we feel this trade went very well,” said Tobias Engel, director, treasury, head of capital markets at Aareal. “The spread of minus 8bp is a fantastic outcome but nothing unusual in this new CBPP environment.

“Looking at the positive performance of the bond, investors seem to be pleased, too.”

The paper was seen trading at re-offer to slightly tighter this (Friday) morning.

The deal was Aareal’s first euro benchmark Pfandbrief since September 2014 and its first benchmark in any currency since March 2015, when it sold a $500m April 2019 issue. Engel said the issuer had been relatively quiet in the interim as a result of acquisitions of Corealcredit and WestImmo.

“Both banks were well funded and due to the fact that we reduced our non-strategic assets in the loan book, funding needs were quite limited,” he said.

No further benchmark issuance emerged after Aareal and SpareBank 1 tapped the market, and bankers expect the pace of supply to continue to be moderated by banks’ blackout periods. With rates largely unaffected by an ECB meeting yesterday (Thursday), at which no major policy announcements were made, those issuers that do come to market are expected to continue to favour the shorter end.

“It’s not just investors who have been clamouring for shorter-dated options,” said a syndicate banker. “It seems issuers are also pretty pleased, as you have to bear in mind that many who sold longer dated deals last year were only doing so because of a lack of alternatives, and guys outside the Eurozone couldn’t even get the shorter funding provided by the TLTROs.

“For so many reasons, fives are the maturity of choice.”