Commerzbank reopened the euro covered bond market today (Tuesday) after a Covid-19-inspired hiatus and attracted over €1.5bn of orders to a €1.25bn 10 year mortgage Pfandbrief, its largest issue in a decade, “pragmatically” pricing it with the highest spread for a German 10 year in over a year.

After European markets rallied further this morning, leads Commerzbank, DZ, Natixis, NordLB, Santander and TD announced the mandate for a 10 year euro benchmark-sized transaction, and opened books at the mid-swaps plus 10bp area. The spread was ultimately set at 8bp on the back of over €1.5bn of demand, excluding joint lead manager interest, and the issue sized at €1.25bn. The deal yielded minus 0.105%.

A syndicate banker at one of the leads said the regular Pfandbrief issuer was one of the best names to test a reopening of the euro covered bond market after a prolonged period of volatility, with the last benchmark issuance having been 12 days ago, on 20 February.

“It’s encouraging for everyone to see it reopen in such a solid fashion,” he said.

“We felt a 10 year struck the right balance between a slightly more defensive tenor,” he added, “and not too negative in outright yield, as Bunds have rallied over the course of the last week.”

He said that given the context surrounding the trade, it represented an exceptional outcome.

“The market had been effectively shut for over a week,” he said, “one of the longer non-seasonally adjusted pauses in the covered market, which is typically quite a robust instrument in terms of market access.

“We had an exceptional close in the US yesterday, which fed into a very stable session overnight in Asia as well as here in Europe, but even so, we did not want to push something through unnecessarily.”

He said the issuer was pragmatic in its pricing strategy and understood that bid/offers had widened in secondaries, not necessarily offering a clear reflection of prevailing clearing prices.

“It’s encouraging to see that we now have a pricing point out there for a bellwether name,” he added, “and a healthy sign for the market in general.”

He said the deal would go a long way towards building confidence in the functioning of the primary market.

“CBPP3-eligible names always help when you want to de-risk,” he said, “and this will be a helpful gauge for some of the other core European issuers looking to go out.”

A syndicate banker away from the leads said the deal was priced attractively against secondaries, based on fair value being at around plus 1bp, and that it subsequently attracted a “very solid” book size.

“Starting at plus 10bp represents an enormous concession of some 9bp,” he added.

However, he said that given the transaction re-established issuance after a pronounced hiatus, conventional pricing comparables were not appropriate.

“At the end of the day, I would not fuss over the NIP versus secondaries with this,” he added. “Looking at super-squeezed, ECB-influenced secondary curves is not much use – secondaries are not necessarily where a bond clears anyway.

“This served as a good price discovery on where the appetite is for a 10 year with a negative re-offer yield, and to get a sizeable trade away at plus 8bp with all that has been going on in the market recently is excellent.”

He said the deal demonstrated the resilience of the covered bond market, and that even after factoring in a 40% Eurosystem bid, a large number of private client investors were left in the book.

“Some might say it was too cheap,” he added, “but I think this was the right thing to do at the moment.”

Another syndicate banker away from the leads said he had heard murmurs of discontent from other German issuers about compatriot Commerzbank offering such a high pick-up, as their bonds widened on the back of the new issue. However, he said it was prudent of Commerzbank to offer such a pick-up.

He said similar issuers would now have to face the “new normal” and pay higher new issue premiums than they would have previously expected.

Another banker said the issue could signal a path towards stability and that if coordinated efforts by central banks and official institutions helped calm markets down – with the Fed announcing a 50bp rate cut after Commerzbank’s deal – a “new market at a new level” would emerge.

“We would have a market at least,” he added, “of that I am certain. Unless things spiral out of control or some bad news comes, or the central banks fail in their efforts, I would not be surprised if we saw more issuers coming.”

However, he said it is unlikely there will be a fully-fledged new wave of supply any time soon.

“I’m sure others are looking,” he said. “There may be a few deals here and there from issuers that are anchored in the core market with some good support from the ECB and big funding programmes, but smaller names will want to wait for more clarity.”

Estonia’s Luminor Bank could launch the first Baltic covered bond this week, subject to market conditions, according to a post-roadshow announcement. It completed its roadshow yesterday (Monday) and after Commerzbank’s execution today said it is monitoring the market for a €500m no-grow five to seven year issue.