DZ Hyp is expected to launch its third euro benchmark covered bond since September on Monday, a long nine year euro benchmark-sized Hypothekenpfandbrief, which syndicate bankers expect to be well received, while supply remains otherwise at historically low levels.

The mandate was announced this (Friday) morning, with ABN Amro, Commerzbank, DZ, Erste, Helaba and Santander as leads.

The German issuer’s last euro benchmark, a €1bn 10 year, was issued in October, while it also tapped the market with a €1bn five year in September.

The long nine year maturity for the new issue is based on DZ Hyp’s ALM requirements, according to a lead syndicate banker.

A banker away from the leads said the nine year maturity bracket is often “neither fish nor fowl”, but that given the strength of the market, it will not make any difference to the outcome.

“Bank treasuries will buy it no matter what,” he said, “so if this is what suits them, it’s where they should go.

“It’s a super-strong name,” he added, “so this is as uncontroversial as it gets.”

According to pre-announcement comparables circulated by the leads, DZ Hyp June 2028s and October 2028s were at mid-swaps minus 0.5bp and mid-swaps flat, mid, respectively, and a €500m Berlin Hyp January 2031 issue launched on Tuesday at mid-swaps flat was at minus 0.5bp.

The lead banker said there is “not a lot of fantasy left” with regards to the compression of covered bond spreads, and therefore the new issue will likely price in the low single-digit area, but given that DZ Hyp is the only Pfandbrief issuer to consistently target a plus-€500m issue size, it is unlikely to press for the very last basis point.

“They know that size has its price,” he said, “this being how they acted last time in October, leaving 1bp on the table, which eventually paid off, as it was a very nice transaction late in the season.”

Another lead banker said the new issue will likely price flat to slightly above DZ Hyp’s curve and that the size will likely be €1bn.

“The market backdrop is strong,” he said, “with the Italian hiccup done and dusted, and Biden being inaugurated without any problems, so I really think investors are ready to jump and they’re going to be checking in next week.”

No other euro benchmarks are in the pipeline, he noted, so the transaction can be expected to have the market to itself, give or take any surprises.

“From Tuesday onwards, I expect a couple of names to be considering covered bonds,” he said, “but I think the main bulk of supply will be coming from senior preferred and senior non-preferred.”

Blackouts are also likely to suppress overall issuance from European banks.

Five euro benchmark transactions totalling €4.75bn were launched this week, bringing year to date euro benchmark supply to €11bn. This is less than half the 2020 supply to 22 January of €23.75bn and, according to ABN Amro fixed income strategist Joost Beaumont, the lowest amount issued during the first three weeks of any year since 2009, when only €2bn of covered bonds were issued soon after the peak of the financial crisis.

Issuance during first three weeks of the year, EUR bn

Source: Bloomberg, ABN Amro