Deutsche Pfandbriefbank (pbb) launched a tender for up to €250m of a €750m 1.875% January 2022 mortgage Pfandbrief yesterday (Wednesday), with German tender and issuance activity contributing to a steepening of the German curve, according to an analyst.

The mortgage Pfandbrief was issued as a €500m deal in January 2014 and increased to €750m in two taps, €100m in November 2019 and €150m as recently as January 2020.

The maximum €250m repurchase amount will leave at least €500m outstanding, meaning pbb’s bond will continue to meet key LCR and index thresholds after the exercise. Maintaining such eligibility was an explicit goal of Berlin Hyp when it became the first German issuer to launch a buyback on 5 June, targeting four issues.

The repurchase level has been set 10bp through mid-swaps and the tender announcement resulted in the bond tightening some 6bp, according to Maureen Schuller, head of financials research at ING.

Alongside Berlin Hyp’s tender for short-dated bonds and its intention to issue a longer-dated Pfandbrief, and LBBW reopening the German euro benchmark sector with a €750m six year on Monday, pbb’s move contributed to a steepening of the Pfandbrief curve, she added. She also noted that €500m of Pfandbriefe will be redeemed this month, which she said tends to support the front end.

“Until the beginning of this month, German covered bond curves had re-flattened quite a bit, particularly over the two to seven year part of the curve, with the seven year belly of the curve outperforming its weighted two to 14 year adjacents,” said Schuller. “However, since the beginning of this month, the two to seven year is steepening again, primarily due to the observed bond repurchase-related outperformance of the front end.

“Considering the current still very flat profile of German covered bond curves up to the 10 year area, both in asset swap terms and as in spread over Bunds, we would have a preference for steepeners over this segment of the curve.”

Berlin Hyp’s tender concludes on Tuesday. Participants could benefit from priority allocations in its planned new longer-dated deal.

“Similar switch operations should also be worthwhile for other Pfandbrief banks,” said DZ Bank analysts. “It will be interesting to also see to what extent investors will respond to this offer.”