Hypo Noe achieved the tightest spread on a euro benchmark since 6 March today (Tuesday), with investors placing more than €2.7bn of orders for its €500m no-grow seven year, and the Austrian’s success in approaching the market for longer term funding is expected to tempt others to follow suit.

After announcing the mandate for a €500m no-grow seven year issue yesterday (Monday), leads BNP Paribas, Commerzbank, Erste, LBBW and NordLB went out this morning with guidance of the mid-swaps plus 25bp area. After an initial update reported books over €1bn, a second update put books above €2.2bn, and guidance was revised to 20bp+/-1bp. The deal was ultimately priced at 19bp on the back of over €2.7bn demand, excluding JLM interest.

Syndicate bankers said it was a reassuring result for the market following more than two months of euro benchmark issuance exclusively comprised of Canadian and French supply.

They highlighted the more than five times subscribed book and a pricing level bearing out the progressive tightening of primary spreads. The last euro benchmark was a €1bn five year from Caffil two weeks ago priced at a re-offer spread of 22bp, while Hypo Noe’s pricing is the tightest on a euro benchmark since Norway’s Eika Boligkreditt sold a €500m seven year on 6 March at 11bp over.

“This is exactly what the market needed,” said a syndicate banker away from the leads, “because firstly, it is someone who is not French, and secondly, it is an Austrian name that provides a provides a pick-up over the underlying government bond as well as over the tight German names.”

He said that in comparison to a German issuer that can typically print at ultra-tight levels to a bespoke domestic audience and the Bundesbank, the Austrian deal appealed to a broader range of investors given it is not a national champion and because of its choice of maturity.

“The seven year tenor is liked and it’s clear they were all interested in this one,” he said. “Everyone is participating – bank treasuries, asset managers – and I would suspect some bought it in anticipation the ECB purchase programme continuing to support the sector, so people will see it as a tightening opportunity.”

Syndicate bankers at and away from the leads saw fair value at around 17bp-18bp, implying 1bp-2bp of new issue premium, and another banker away from the leads said its pricing at 19bp was slightly tighter than expected.

“If it went normally, I would have presumed they’d price at 21bp,” he said, “and if it went exuberantly, I would have presumed 19bp, which is pretty much the evolution of the trade as we saw it today.

“It’s an issuer’s market and demand is overshooting by multiples given we’ve seen so little issues as of late, so in that respect, it’s not too big of a surprise that it worked as it did.”

Hypo Noe’s euro benchmark is only the second since 6 March to have a maturity as long as seven years, after a €1.25bn CRH deal on 23 April.

A lead syndicate banker said that although more attractive shorter term funding is available to the issuer via TLTRO III, it decided to issue a covered bond in favour of longer term funding.

“The covered bond spreads made sense from an economic, duration and ALM perspective,” he said, “and while it is not the first name you’d expect to come out of Austria, it is well established issuer with an outstanding curve.

“We felt it would be a very good name to fill the gap where there’s no supply,” he added, “as we were quite sure there would be ample demand, and in the end we were a bit surprised how big the demand actually was – it was a tremendous result.”

The lead banker said bank treasuries drove demand, comprising just under 70% of the book, which comprised over 120 accounts.

“We had a really broad range of investors in the book,” he said, “which was the full range of real-money accounts, bank treasuries, central banks and official institutions, including the purchase programme. Germany and Austria were obviously the main jurisdictions, but we saw a nice international response from the Nordics, southern Europe and all over.”

Another syndicate banker away from the leads said the deal is very likely to spur other issuers to approach the market.

“This will definitely make some trigger-happy,” he said. “We’ve seen a decent compression in spreads recently and considering where we’ve moved from a few weeks back, levels are becoming increasingly attractive – euro funding looks more attractive versus some of the domestic niche currencies issuers may have access to – so I wouldn’t be surprised to see slightly more euro covereds going forward.”

The last Austrian euro benchmark was a €500m eight year for Bawag PSK on 15 January, which was priced at 6bp over mid-swaps.