CIBC extended out to eight years to reach a positive yield on a EUR1bn covered bond today (Wednesday) and found sufficient interest to achieve pricing flat to fair value, while Santander drew over EUR3.7bn of demand to a EUR1.5bn 10 year that offered investors both spread and yield pick-ups.

After CIBC’s mandate was announced yesterday (Tuesday) afternoon, leads ABN Amro, BNP Paribas, CIBC, DZ and HSBC opened books for the euro benchmark-sized eight year trade with initial guidance of the 13bp over mid-swaps area. After a little over an hour, the leads reported books above EUR1bn, including EUR75m joint lead manger interest, and after around three hours revised guidance to 10bp/-1bp, WPIR, on the back of more than EUR1.9bn of demand. The spread was ultimately fixed at 9bp over and the size at EUR1bn (C$1.48bn), with more than EUR1.8bn of demand, excluding JLM interest, good at re-offer.

The deal was priced at a yield of 0.041%, with the eight year swap rate at minus 0.049%, but a syndicate banker away from the leads said that investors were clearly positioning for a longer period of negative yields and “happy to jump on the bandwagon” for something in positive territory.

CIBC issued the first negative yielding euro benchmark covered bond from a non-Eurozone issuer in July 2016, but, according to a lead syndicate banker, did not want to test appetite for such a trade for a second time. It therefore extended into a longer maturity than typical of Canadian covered bonds to offer a positive yield.

“Given the circumstances, this was a truly successful trade,” he added. “Hats off to Wojtek and the team at CIBC.”

Bankers at and away from the leads said the deal came roughly flat to fair value, deeming that an impressive outcome. The lead banker said the leads were pleasantly surprised that some investors who had initially limited their orders at 10bp ultimately came in to the trade at 9bp, and noted that hardly any orders dropped out.

Santander hit the market this morning, to some bankers’ surprise, with its 10 year benchmark only a little over two months after having issued a EUR1.5bn 12 year at 23bp over on 30 April. It had also issued a EUR1bn 10 year in October 2018.

Leads Banca IMI, Deutsche, NatWest, Nomura and Santander went out with an initial level of 20bp over mid-swaps, which raised eyebrows among some market participants, with the Spanish bank’s 12 year cédulas quoted at 15bp over.

However, the leads were able to generate over EUR3.7bn of demand and tighten pricing 5bp to 15bp over, which a lead banker said represented “a fantastic outcome”.

Bankers at and away from the leads said the re-offer level implied a new issue premium of some 5bp, with one remarking that investors will have found this particularly attractive coming from Santander. However, another considered the spread relatively tight, noting that it was only a few basis points wider than where a Canadian 10 year, for example, would come.

“Anything you can offer accounts that has duration should find a home,” he added. “Of course, you can do negative yielding trades that we’ve seen a couple of times this week and last, but what probably really helps is doing something with a higher spread and a positive yield.

“And if you look at how everything is tight and the curve is flat, then it makes sense for Santander to lock in some extra funding at the long end.”

Bankers questioned who the next “Braveheart” to come in negative territory would be. One suggested that other Canadian issuers might be hesitant to follow CIBC’s example and go longer, but also avoid testing a negative yield, even if their covered bonds are ECB repo-eligible. He suggested that a Nordic issuer or Rabobank would be an appropriate test beyond Germany’s Helaba, which reopened negative territory last week.