A rare Eu500m four year Pfandbrief for Berlin Hyp attracted some Eu2bn of demand despite a yield of minus 0.108% and the year’s tightest spread today (Tuesday), riding pent-up short end demand to a wholly positive outcome, according to head of investor relations and sales Bodo Winkler.

Berlin Hyp sold the first negative yielding benchmark covered bond, a Eu500m three year issue in March 2016, and although the deal found strong demand – attracting some Eu1.4bn of orders – only one new euro benchmark covered bond has been priced with a negative yield since – a Eu1.25bn six year for Canadian Imperial Bank of Commerce (CIBC) in June 2016.

Winkler told The CBR that the issuer had received feedback from investors while on non-deal related roadshows that indicated there was substantial demand for another short-dated, negative yielding issue.

“Many investors complained that there is a lack of short-dated material, so we were quite sure there would be good demand,” he said.

Winkler added that Berlin Hyp’s maturity profile has consistently grown longer over recent years, and said the new issue allowed it to manager its assets and liabilities while filling a gap in its covered bond curve in the latter half of 2021.

The issuer announced yesterday (Monday) afternoon that it had mandated Barclays, Commerzbank, DZ, JP Morgan and LBBW to lead manage the Eu500m no-grow mortgage Pfandbrief. With the four year swap rate around 6bp when the deal was announced, and at around the same level today, it was all but certain the new issue would be priced with a negative yield.

The deal was launched at 9:00 CET this morning with guidance of the mid-swaps minus 14bp area and with the coupon set at 0.0%. At just after 9:45, guidance was revised to the minus 16bp area, plus or minus 1bp will price within range, with books at Eu1.35bn, including Eu210m joint lead manager interest.

The spread was set at minus 17bp just over 20 minutes later, with books above Eu1.75bn, including Eu210m JLM interest. The book closed at close to Eu2bn.

The deal was priced with a 0% coupon, a re-offer price of 100.433% and a yield of minus 0.108%. The deal is the tightest new euro benchmark covered bond since August 2016, when WL Bank priced a Eu500m 10 year at minus 17bp.

“It is a Pfandbrief transaction where everything that you can say about it is in a way negative – it has a negative yield, a negative spread versus three month mid-swaps, versus six month mid-swaps and versus Eonia swaps – but with a very positive outcome,” said Winkler. “We have produced a transaction with very high oversubscription and with a really high allocation to foreign investors.

“We expected that there would be good demand, but this still pleasantly surprised us.”

Some 51% of the deal was allocated to foreign accounts, a higher share than in any of Berlin Hyp’s previous benchmark issues, surpassing the 47% allocated abroad in its last Green Pfandbrief.

Bankers noted that the book is one of the largest for any benchmark Pfandbrief this year.

“It is impressive for any Pfandbrief, never mind one with a negative yield,” said a syndicate banker away from the leads.

Bankers attributed the deal’s success in part to the “huge” amounts of liquidity in the market and the rarity of such short-dated German supply.

“If you’re trying to find a home for your cash in shorter maturities, then there’s nothing else you can get,” said a syndicate banker at one of the leads. “There’s no paper available on the secondary markets in covereds, and your only alternative is to buy even more expensive agencies or govvies.”

The deal was seen as offering a pick-up of over 40bp versus Bunds.

It is only the second benchmark Pfandbrief with a maturity of four years or shorter this year, following a Eu500m three year issue for HSH Nordbank in July. Such deals have been rare since the launch of CBPP3, as the Pfandbrief curve has often traded deeply in negative yield territory even up to medium maturities, and most issuers have therefore preferred to tap euros with longer maturities and fulfil any shorter funding needs through other means – with US dollar covered bonds, for example.

The deal was deemed to have offered a new issue premium of around 3bp versus Berlin Hyp’s secondaries, with Berlin Hyp 2021s seen at minus 21bp-20bp, mid. Berlin Hyp has issued two benchmark Pfandbriefe already this year, the last a Eu500m long six year green issue in June, which was seen today at around minus 19bp, mid.

While a flow of negative yielding benchmarks expected by some market participants did not arrive after Berlin Hyp’s first such issue, bankers said the new issue reaffirmed that they are an option for issuers and investors.

“This is a very successful story for Berlin Hyp but also for issuers and investors,” said a syndicate banker at one of the leads. “It shows that you there is a good alternative asset if you are looking for high grade, triple-A paper in shorter maturities.

“The euro market is where it is.”

Berlin Hyp’s deal attracted 54 orders, with Germany taking 49%, the Benelux 14%, Asia 10%, the Nordics 6%, Switzerland 6%, the UK 5%, Austria 4%, the Middle East 4%, and others 2%. Banks were allocated 51%, central banks and agencies 30%, and funds 19%.