Aareal Bank issued its first Sonia-linked transaction yesterday (Thursday), successfully placing a £500m four year floating rate note after Deutsche Pfandbriefbank (pbb) issued a £500m three year at a record tight level on Tuesday.

After Aareal’s mandate was announced on Wednesday, leads Deutsche, HSBC, NatWest and Nomura went out with guidance of the Sonia plus 34bp area for the sterling benchmark-sized April 2025 mortgage Pfandbrief yesterday morning. They reported books above £450m after a little over three hours, and an hour later set the spread at 31bp on the back of more than £575m of orders. The final book totalled more than £570m and the size was set at £500m (€577m).

Compatriot pbb had on Tuesday issued its £500m three year at 27bp over Sonia – the tightest price on a Sonia covered bond (including UK issuance) since the rate came into use in 2018. Together, the two deals double sterling covered bond supply for the year, which previously constituted just one deal, a £1bn 10 year FRN from Nationwide Building Society in February.

“It was nice to see a bit of supply,” said a syndicate banker away from the leads. “The absence of issuance has been a bit of a disappointment to investors.”

A syndicate banker at the one of the leads – who were the same for both trades – said that it was coincidental that the two German issuers were looking at the market at the same time, and that Aareal came after pbb simply because it needed slightly more time before it could issue.

“The dynamics were very similar,” he added, “with similar levels in terms of spread expectations and similar investor demand.”

He said the Sonia curve between three and four years is worth 3bp-4bp, meaning that Aareal’s 31bp level was very much in line with pbb’s 27bp.

“Pbb has a lower rating [Aa1] than Aareal’s triple-A,” he added, “but pbb has a track record in sterling, whereas this was a debut for Aareal.”

A banker away from the leads said that interest in the German supply has increased as SSA Sonia paper has tightened.

“There was a reasonable amount of sterling SSA issuance in the first quarter, but spreads have really rallied and they are no longer meeting the minimum returns that these Sonia investors are looking for,” he said. “They have either been dragged into longer dated EIB, KfW paper, which doesn’t really suit them, or are getting themselves comfortable with names that would not necessarily be their first choice, meaning that they are getting availability for these German names in the 25bp-35bp area.”

As with pbb’s trade, Aareal’s meanwhile came at a historically tight pick-up over where the issuer might raise funding via a euro benchmark.

“This all means sterling can genuinely compete with euros in these shorter tenors,” added the syndicate banker. “The cost for these lower rated issuers of converting euros into sterling to match their assets would be 5bp-15bp, so if they can print directly in sterling and get the natural hedge, that helps.”