Investors piled into a EUR500m no-grow 15 year DZ Hyp Pfandbrief this morning, placing over EUR2.4bn of orders in the space of an hour, allowing for pricing flat to fair value, as the deal crystallized demand for long-dated assets amid the renewed low yield environment.

The German issuer announced the mandate for its new issue yesterday (Monday) morning, on a day when no other euro benchmark covered bonds were launched, and then had the market to itself today.

Leads BayernLB, DZ, Erste, Natixis and UBS went out with initial guidance of the 11bp over mid-swaps area for the EUR500m no-grow mortgage Pfandbrief at 9.00 CET. Around half an hour later they reported books above EUR1.7bn, including EUR105m joint lead manager interest, and revised guidance to mid-swaps plus 8bp+/-1bp, will price in range. After less than an hour, at around 9.55 CET, the spread was set at 7bp with books due to close five minutes later. The leads ultimately more than EUR2.4bn of orders, excluding JPM interest, allocatable at re-offer, with 94 accounts receiving bonds.

“The books were closed after just one hour because we were so heavily flooded by various investors from different parts,” said a syndicate banker at one of the leads. “I don’t remember such a trade where we had almost 100 accounts in the book for a German Pfandbrief, especially for a EUR500m no-grow trade, but here we had 94 accounts and were almost five times subscribed.

“The price sensitivity in the book was ridiculously low,” added. “We saw investors that usually scale down or even drop their orders when we move the spread by 1bp-2bp but who today even joined the party when we were moving 4bp. Finally only about EUR30m of orders were limited, so we could easily drive down the spread and still have granular demand.”

He said non-German interest accounting for 47% of distribution was “quite impressive”. Germany was allocated 53%, Austria and Switzerland 13%, southern Europe 11%, the UK 10%, Scandinavia 8%, the Benelux 3%, and others 2%. Banks took 58%, asset managers and funds 29%, central banks and official institutions 8%, and insurance companies and pension funds 5% –the lead banker suggested the relatively low share to the latter could to some extent be explained by some crossover with accounts classified as asset managers.

The leads put fair value at 7bp, meaning the issue attracted such strong demand without paying a new issue premium. Among pre-announcement comparables circulated by the leads yesterday, DZ Hyp January 2030 paper was quoted at an i-spread of 3bp, mid, and Commerzbank January 2034 paper at 7bp over. Commerzbank’s 2034 issue was the last German 15 year benchmark, a EUR750m deal priced at 19bp over mid-swaps on 2 January, the first day of issuance in 2019. The deal meanwhile paid 71.3bp over Bunds.

The lead syndicate banker said the transaction took advantage of investors’ search for long-dated paper amid the renewed low yield environment, citing stronger than usual demand for comparable assets, such as German Länder, in recent sessions as evidence of this. He also suggested that improvements in the outlook for Brexit or regarding trade wars, or less dovish noises from the ECB or Fed, could quickly curtail opportunities to issue at the long end.

“So we said, OK, maybe now is the time to go for this, even if you are offering yields in 15 years that you offered for 10 years at the start of the year,” he added.

Today’s deal paid the same 0.875% coupon as DZ Hyp’s last benchmark, a EUR750m 10 year on 23 January, although that yielded 0.881% compared with 0.934% for the 15 year.

A syndicate banker away from the leads said the demand reflected the “crazy times” of today’s market, but suggested more such supply could follow – although more likely next week to avoid any potential Brexit headlines later this week.

“I wouldn’t be surprised – if the market can digest the latest on Brexit immediately and remain open – to see other issuers that eye the long end approach the market with an opportunistic trade at the very long end,” he said. “Maybe they could also limit this to EUR500m, or there are some Dutch issuers, for example, who often look at the very long end of the curve, even 20 years, with EUR1bn-plus trades, who will say, why not do something opportunistically?”

Photo: DZ Hyp offices, Hamburg; Copyright: DZ Hyp