Berlin Hyp is set to launch the most negative yielding benchmark covered bond ever tomorrow (Tuesday), a three year Pfandbrief that is expected to be priced well through the ECB deposit rate and could signal the extent to which investors will participate in such deeply negative issuance.

BayernLB, Commerzbank, Crédit Agricole, JP Morgan and UniCredit are mandated as leads for the benchmark-sized transaction.

Helaba on 26 June launched the previous lowest yielding benchmark covered bond, a EUR750m five year Pfandbrief at minus 0.227%, but Berlin Hyp’s shorter dated benchmark could offer a negative yield of around 0.55%, estimated one syndicate banker, assuming some basis points of new issue premium. Another noted that three year Pfandbriefe are trading at around mid-swaps minus 5bp, mid, putting fair value at minus 0.60%.

Although several benchmarks have now been launched with negative yields – mainly during CBPP3 – at such a level Berlin Hyp’s deal would be the first to be priced through the ECB’s deposit rate.

“We’re talking about a deeply negative yield, more than 10bp below the ECB threshold of minus 0.40%,” said the first syndicate banker. “Even though a large part of the secondary covered bond universe is trading at negative yields, these levels have not yet been validated by a primary print. It will be interesting to see how they negotiate that territory and to have a new reference point.

“It’s brave of them, when many people are recommending going long,” he added. “I’m keeping my fingers crossed.”

Several issuers told The CBR they were encouraged when Helaba issued its five year benchmark to see that such negative yielding benchmarks were viable, even if follow-on supply has so far been minimal. Berlin Hyp’s new issue could provide a similar signal, if successful.

The continued fall in yields has pushed swap rates so low that, for covered bonds priced close to flat to mid-swaps, issuers have to go out as far as almost eight years to price at a yield above the ECB deposit rate, according to one banker, while Berlin Hyp, for example, might have to extend as far as 15 years to offer a positive yield.

Berlin Hyp issued the first ever negative-yielding benchmark covered bond, a EUR500m three year in March 2016 at a yield of minus 0.162%. It had been expected to issue the longest negative-yielding benchmark on 10 July, but the EUR500m eight year was priced at a yield of zero following a move in swap rates.

At the time, Berlin Hyp head of funding and IR Bodo Winker told The CBR he felt that an increasing number of investors had gotten used to negative yields, “as long as it is not heavily negative”.

Although Berlin Hyp’s deal would be the first this month, bankers do not expect it to be a “reopener” in the sense that further supply will follow immediately, although issuance is expected to pick up in the next couple of weeks as market participants return from their summer breaks.

ASB Finance will on 2 September begin a European roadshow for a euro benchmark in either senior or covered bond format, subject to market conditions. Barclays, CBA and UBS have the mandate.