Landesbank Hessen-Thüringen (Helaba) set a record low for euro benchmark covered bond yields of minus 0.227% for a five year Pfandbrief today (Wednesday), but was able to find over EUR1bn of buyers and size its deal at EUR750m, although bankers warned that such trades may not be open to all.

Berlin Hyp sold the first negative yielding euro benchmark in March 2016 to prove them viable, but only a handful followed that year and next. Helaba’s new issue represented the first test since euro yields headed down to record lows amid a dovish interest rate environment and growing speculation that the European Central Bank may reactivate its asset purchase programme (APP) in some form.

The reduction in yields has in recent weeks seen core issuers move out into longer maturities, such as eight years, to avoid pricing new issues with negative yields, but, according to a syndicate banker at one of Helaba’s leads, the German issuer was a prime candidate to test a shorter dated negative yielding benchmark.

“Helaba is hugely popular, German, a regular issuer, and of undoubted quality – the world and his wife know it,” he said. “They were also professional from the start and pragmatic in their approach. You need a very strong base bid to try something like this, and Helaba apparently had, so could take that risk.

“Between the leads our level of confidence was somewhere around the 40% to 60% level,” he added. “We have never seen something like this before – this is the deepest negative yielding covered bond to date – and it was not obvious it would work.”

Leads DZ, Helaba, ING, SG and UBS went out with guidance of the mid-swaps flat area for a euro benchmark-sized five year mortgage Pfandbrief. After a little over an hour, the books were well above EUR500m, according to a first update from the leads, and guidance was revised to minus 1bp+/-1bp, WPIR, on the back of books close to EUR1bn after a little over two and a quarter hours. The spread was set at minus 2bp and size at EUR750m on the back of well above EUR1.1bn of demand, and the book at re-offer was above EUR1.1bn.

“In the end we were a bit surprised how it went,” said the lead banker. “The covered bond market, with very, very few exceptions, has not been receptive to negative yielding deals before – there have only been four or five. But of course at some stage you have to ask if they were not done because there was not appetite, or there was not appetite because they were not done.”

A funding official at another German issuer said he welcomed Helaba’s trade, given that it proved such negative yielding deals are viable and would obviate the need to go longer or seek alternative shorter dated funding sources.

A large investor said that he expected the low spread, low yield environment to persist for some time, meaning more such deals could be expected to follow.

The lead banker, however, said that it remains uncertain how broad a variety of issuers will be execute such trades.

“LBBW or a super-well established German name could,” he said. “Otherwise it could remain very special.”

He noted that spread sensitivity among investors was particularly, with many reducing their orders as pricing was tightened, but put this down to a focus – particularly by bank treasuries – on relative value in the five year part of the curve – versus a focus on yields at the long end – rather than any consequence of the negative yield.

“Those who joined are able to withstand a lot of pain,” he added.

He put the new issue premium at around 2bp, deeming this marginally higher than similar recent trades.

The zero coupon deal was priced above par, and offered a pick-up of 42.8bp over Bunds.