Caffil and Erste were able to take EUR1bn of orders apiece for new covered bond issues today (Tuesday) in spite of an overnight weakening of market conditions, with the French issuer’s 20 year OF supported by dovish ECB rates guidance. The changeability offered a taste of things to come, said bankers.

Caisse Française de Financement Local (Caffil) and Erste Group Bank announced mandates for the new issues yesterday morning, when LBBW and SG were in the market with EUR500m and EUR750m deals that attracted more than EUR1.6bn and EUR1.3bn of demand, respectively, offering hope that this week would provide a strong execution window on the back of supportive ECB announcements last week.

However, market conditions turned for the worst overnight as global stock markets were hit by escalated rhetoric on a potential US-China trade war, and although both deals went ahead, bankers said the issuers had to contend with a less accommodating market.

“It was a pretty weak day – not as bad as it was upon Italy a couple of weeks ago – but still pretty weak,” said a syndicate banker. “The covered bond market may not be immune to what is happening on the global and political stage, but it is perhaps just a question of adjusting the starting levels a bit, and on a day like today you should still have execution certainty.”

Syndicate bankers at the issuers’ leads said they had decided to go ahead with the trades after assessing the market and getting a sense of investor sentiment.

One suggested this type of execution could become more common in the second half of the year, as the market heads towards the end of the ECB QE era.

“This is what it’s going to be like,” he said. “You won’t have months of full visibility aided by the ECB or a market that is always bullish – we are on the opposite track.

“You will need to carefully navigate windows, and I think here we adjusted very well.”

Caffil leads Citi, Crédit Agricole, DZ, LBBW and Natixis launched its EUR500m no-grow 20 year public sector obligations foncières this morning with guidance of the mid-swaps plus 17bp area. After around 40 minutes, the leads announced that books were well above EUR550m, excluding joint lead manager interest.

Guidance was subsequently revised to the 15bp area, plus or minus 1bp, with books above EUR750m, excluding JLM interest, before the spread was set at 14bp with books at EUR1bn, including EUR105m JLM interest. The deal was priced with a coupon of 1.5% and a yield of 1.561%.

“A EUR1bn book for a EUR500m 20 year trade in today’s weak market is a very strong result for Caffil,” said a syndicate banker at one of the leads.

A syndicate banker away from the leads agreed the demand was a good outcome given that a 20 year issue is a “sensitive” product.

The lead syndicate banker said dovish guidance on interest rates provided by the ECB last Thursday offered comfort on the market depth for a rare 20 year covered bond issuance, and said the deal found traction with yield-driven investors that displayed a higher degree of conviction with the tenor.

Rates have fallen since the ECB meeting last week, syndicate bankers noted, potentially making long-dated investments less attractive, but they said the ECB’s insistence that it will not raise rates until at least after next summer gave investors confidence that yields will not rise quickly.

Bankers said the deal offered a new issue premium of around 6bp-7bp, with Caffil May 2032s, January 2033s and January 2035s all seen trading at around 7bp, mid, pre-announcement. Bankers also cited as a comparable the last 20 year euro benchmark covered bond, an April 2038 issue for Rabobank seen at around 6bp, mid.

“The mid-single digit new issue premium versus peers and strong relative value terms versus the OAT and Bund curves, of around 30bp and 70bp respectively, made the difference,” said the lead syndicate banker.

Erste Group Bank leads DZ, Erste, LBBW and SG launched the Austrian six year benchmark this morning with guidance of the mid-swaps flat area. Around one hour and 15 minutes later, the leads announced that books were above EUR750m, including EUR55m joint lead manager interest.

The final spread was subsequently set at minus 2bp with books well above EUR950m, including EUR55m JLM interest. The size was later set at EUR750m with final books over EUR1bn.

“It was a very good reception, given the market conditions,” said a syndicate banker at one of the leads.

The final spread incorporated a new issue premium of around 6bp, bankers said, with Erste January 2023s seen at minus 8bp, mid, February 2025s at minus 7bp, and April 2026s at minus 4bp.

Syndicate bankers said another issuer is considering launching a covered bond with an intermediate maturity, which could emerge tomorrow (Wednesday).