Investors working to conservative benchmarks will have to face the “new reality” of negative yields, but covered bonds can still make sense on a relative value basis – although renewed QE could affect dynamics, portfolio managers and bankers told a conference in Frankfurt on Thursday.

The Covered Bond Investor Conference conference – hosted by the ICMA Covered Bond Investor Council and The Covered Bond Report – took place the day after Helaba sold the lowest ever yielding euro benchmark covered bond, a EUR750m five year mortgage Pfandbrief priced at minus 0.227%. The deal was the first negative yielding euro benchmark covered bond since the end of CBPP3, during which a handful of trades were issued at negative yields.

In spite of the deeply minus yield, the transaction attracted more than EUR1.1bn of orders.

“To be honest, I was astonished by the internal appetite for the paper, because to be quite frank it was well above the ticket size we usually have for a primary deal,” said Daniel Rauch, senior portfolio manager, Union Investment.

However, he noted that the biggest chunk was to LCR-driven funds.

“Looking at my personal funds, which are not LCR-driven, obviously the deal didn’t gain much traction,” he added, “and I’m glad I have the opportunity to switch into other areas.”

Andreas Denger, senior portfolio manager, covered bond analyst, at MEAG, echoed this.

“If you’ve got conservative benchmarks, you need to buy the stuff,” he said.

Denger nevertheless said that it is important to consider relative value.

“It’s expensive, yes,” he said. “Normally it doesn’t make sense to buy, but what are your other opportunities? Minus 0.20% or 0.25% is better than minus 0.40%, minus 0.50%, minus 0.60% – that’s an easy calculation.

“What you need to bear in mind is that even with a negative yield you can still make money,” he added. “Relatively speaking, you can still make performance with negative yields.”

Indeed, Zuzana Stockton, head of covered bond syndicate in EMEA, Deutsche Bank, noted that KfW was trading at around minus 0.40% and the five year Bund at minus 0.66%.

“Minus 0.22% still feels like a bargain,” she said, noting that for many investors Pfandbriefe woudl be next down the “food chain” of liquid products.

“Given where we are in term of the rates environment, it’s unfortunately the new reality.”

Although “everything is super-expensive”, Maureen Schuller, head of financials research at ING, warned that should the European Central Bank reactivate its asset purchase programme (APP), relative value within covered bonds could be affected.

“Nowadays jurisdictions that were not part of the covered bond purchase programme (CBPP3) trade almost as compressed as jurisdictions that were previously part of the purchase programme,” she said. “We may obviously see those dynamics change.”

But Schuller said that – even if APP-eligible names could benefit from a restart of net new buying – names trading at the wider end of the market could outperform.

“If you believe in the further tightening of spreads, then I think everything that offers a little bit of a spread pick-up will still probably be best performing going forward,” she said. “At this stage, if you look at spreads themselves, they are not as tight as they were.”

And she said she expects covered bonds’ price performance to be supported by expectations of the ECB cutting rates against a backdrop of slowing economic growth.

Dirk Husnik, director – syndicate, BayernLB, agreed that technical factors should support stable or tighter spreads, but that the primary market could feel some upward pressure.

“I could imagine that investors will require higher new issue premiums, just to balance the negative yields,” he said. “That’s something we have already seen in Q3, Q4 2016.

“When the primary market restarted after the summer break, we saw even higher new issue premiums from trade to trade, like a ladder going up and up, and then spreads widened. So that’s something that could happen as well.”

Rauch meanwhile warned that the broader distorting impact of CBPP3 could return should the ECB ramp up its involvement in the covered bond market again. After the launch of CBPP3 Rauch warned that the central bank was just leaving “breadcrumbs” for investor like him, and he said he sticks to this view.

“I’m placing a big question mark on a fourth programme,” he said, “but you never know.

“If a new purchase programme is to be expected, we need to watch out.”