The success of a EUR1bn three year Berlin Hyp Pfandbrief yielding minus 0.588% yesterday is a positive message for the market, according to head of funding and IR Bodo Winkler, who said the issuer had been confident of success even if it adopted a cautious execution strategy.

The deal is Berlin Hyp’s third negative-yielding benchmark, following a EUR500m three year in March 2016 – which was the first negative-yielding benchmark covered bond – and a EUR500m four year in November 2017, meaning that it has issued more benchmarks at negative yields than the rest of the market combined (CIBC and Helaba being the only other two issuers).

Berlin Hyp’s new issue came only six weeks after it last tapped the market, with a EUR500m eight year green Pfandbrief on 10 July. That had been expected to be priced with a negative yield, but after a move in rates was priced with a zero yield.

Winkler said at the time that the issuer was not afraid of issuing bonds with a negative yield, with its past experience giving it confidence and investors having become used to the phenomenon. However, he noted that whereas the yield on its three year in 2016 had been minus 0.162%, a new three year would have been close to the ECB deposit rate of minus 0.40% – “That’s a different world,” he added.

Speaking to The CBR after yesterday’s three year was priced below the ECB deposit rate, Winkler said the environment had changed again since the eight year July trade. Between 10 July and yesterday the yield on the three year Bund, for example, has fallen from minus 0.75% to around minus 0.95% yesterday, and Berlin Hyp’s new issue (priced above par with a 0.01% coupon) came at minus 0.588% – the lowest ever yield on a benchmark covered bond.

“There has been a massive move in swaps in just the past couple of weeks,” said Winkler. “Looking at the swap curve, if you thought only positive-yielding issuance were possible, everybody would only be able to issue super-long bonds – and these do not match our lending at all.

“So you have to concern yourself with asking whether it is possible to come to the market in shorter maturities.”

He said Berlin Hyp has engaged in such discussions with investors on an ongoing basis and could also draw on its past experience.

“We have seen who always buys into bonds in combination with a swap, and then the absolute yield environment is not necessarily important anymore,” said Winkler. “In the end we felt that we could offer something quite attractive to investors, because it was positive against Eonia swaps and three month Euribor swaps, and those positive spreads drove demand.”

According to a lead syndicate banker, the level of mid-swaps minus 2bp swapped to Euribor plus 5bp and Eonia plus 13bp.

“We were very sure that we could do at least a solid EUR500m deal,” added Winkler. “We hoped for more, but our maximum limit was EUR1bn. So the outcome was perfect: it was our maximum possible deal size at the lowest possible spread.”

Bankers at and away from the leads said execution had been supported by the issuer’s decision to limit the potential pricing range from the outset, to mid-swaps flat to minus 2bp, will price in range (WPIR). Although Berlin Hyp has previously refrained from large pricing moves, Winkler said the peculiarities of the latest issue made this particularly relevant.

“First of all, it was the first covered bond after the summer break,” he said. “Then it was the first covered bond after this massive yield decline during the past weeks. And it was one of the very few this year with a maturity of less than five years. So there were a lot of unusual aspects coming together.

“We therefore wanted to give investors as much certainty as possible as to where this bond could be priced in order to encourage them to participate. I believe this transparent strategy contributed quite significantly to the success of the deal, as we got very positive investor feedback on it.”

After announcing the mandate on Monday, leads BayernLB, Commerzbank, Crédit Agricole, JP Morgan and UniCredit went out with the flat to minus 2bp, WPIR, guidance. Books were above EUR600m after around half an hour and the pricing was set at minus 2bp after around an hour and a quarter on the back of more than EUR1bn of orders. The size was set at EUR1bn after around an hour and 45 minutes.

The final order book was around EUR1.15bn, comprising 38 accounts. Winkler noted that although these statistics were lower than for the eight year green Pfandbrief or a EUR500m 10 year it issued on 22 May, the individual orders were larger.

“What is quite striking,” he added, “is that the geographical breakdown is exactly the same percentage of domestic and non-domestic investors as it was in the latest green Pfandbrief, 41.5% domestic and 58.5% non-domestic.

“German Pfandbriefe have a very deep domestic investor base and usually only a smaller share of foreign investors, and our achievement is a testimony to Berlin Hyp’s status among foreign investors.”

Syndicate bankers said they were pleased to see the market pass what was considered a test of the viability of such deeply negative-yielding issuance, and Winkler echoed this.

“The most positive message from our point of view,” he said, “is that even in this very unusual market it is possible to have successful transactions even with a short maturity in a deeply negative yield environment. That is very positive and hopefully encourages others to have a closer look at the market.”