Concern that short-dated issuance could become more challenging after the forthcoming ECB meeting contributed to Münchener Hypothekenbank last week entering the market with a EUR500m four year mortgage Pfandbrief yielding minus 0.567%, according to a funding official at the German bank.

The European Central Bank is widely expected to announce a cut in its deposit rate from minus 0.40% and potentially a restart of its asset purchase programme after its governing council meeting on Thursday of next week (12 September), and anticipation of these moves has contributed to pushing yields into unprecedentedly negative territory.

MünchenerHyp announced its mandate on Wednesday after Berlin Hyp had on Tuesday of the previous week (20 August) issued the lowest yielding benchmark covered bond ever, a EUR1bn three year at minus 0.588%, which was also the first to be priced at a yield below the ECB deposit rate.

Martin Schmid, head of strategic funding and ALM at MünchenerHyp, said that although an ECB rate cut and QE measures are priced in, there remains a high degree of uncertainty, with the potential for the yield curve to invert.

“Due to the ECB measures short durations will not be so possible in the future or it will be necessary to pay up,” he told The CBR, “so we think it was the right plan to do this short-dated Pfandbrief now and not in two or three weeks.

“Berlin Hyp gave us a certain level of confidence,” added Schmid, “but rates were a little different one week on and it’s hard to predict just what the right levels for investors are.”

Leads BayernLB, Credit Suisse, DZ and Helaba priced the new 0.01% four year mortgage Pfandbrief at 2bp through mid-swaps on the back of a final book above EUR860m, following guidance of the minus 1bp area. The yield was 0.567%, equivalent to 38.4bp over the Bund.

“We are really happy about the trade,” said Schmid. “Perhaps it would have been possible to price it as minus 3bp, but there is a thin line between success and failure, so we decided to do it at minus 2bp and give investors more confidence.

“At minus 2bp we are at the same level as Berlin Hyp,” he added, “but as we have a longer duration we are a little bit tighter.”

The EUR860m-plus book included 30 accounts.

“That’s not too many, but OK,” said Schmid. “Due to the negative yield, many investors aren’t able to participate in these trades. We expected this to be driven by bank treasuries and central banks, and that was really fulfilled as they came in with large orders.”

A week before its new issue, MünchenerHyp on 22 August announced that its new commercial property financing business grew by around EUR1.6bn in the first half of the year, almost twice as much as in the first six months of 2018. Schmid said that this contributed to MünchenerHyp launching a new short-dated Pfandbrief relatively soon after its last, when it issued a $600m (EUR532m) three year deal on 16 July.

“This Pfandbrief was absolutely perfect in matching our commercial lending, which has a duration of roughly four years, much shorter than on the residential side,” he added. “And it allows us to show our commitment to those euro investors who like short-dated paper.”

MünchenerHyp’s short-dated euro and dollar issues came after it in April sold the longest ever Pfandbrief benchmark, a EUR500m 20 year. Schmid said that the issuer could return with another benchmark this year, although this would likely be in a longer-dated maturity.