BayernLB underlined the strength of the covered bond market today (Monday) by pricing a four times oversubscribed €500m 10 year Pfandbrief 1bp inside fair value, at the tightest euro benchmark spread this year, with MüHyp and Nationwide set to follow tomorrow with 15 and 20 year trades, respectively.

Following a mandate announcement on Friday, BayernLB leads BayernLB, BNP Paribas, ING, Natixis and Santander this morning went out with initial guidance of the mid-swaps plus 1bp area for the €500m no-grow April 2031 mortgage Pfandbrief, rated Aaa. The leads reported books above €1bn, excluding joint lead manager interest, after around half an hour, and after close to an hour revised guidance to minus 3bp+/-1bp, will price in range, on the back of books above €2bn, including €50m JLM interest. The pricing was subsequently set at minus 4bp on the back of books above €2.2bn, including €50m JLM interest, and the final book at re-offer was €2.2bn.

The persistence of demand and level of pricing surprised syndicate bankers away from the leads.

“It’s just testament to how the technical lack of supply is fuelling the market, allowing for pricing inside fair value without any problems on the back of being four times done,” said one.

He noted that the Free State of Bavaria had today priced a 10 year trade 1bp wider than the state’s Landesbank.

“That’s down to the lack of supply in covered,” he added.

Syndicate bankers put fair value at minus 3bp, also noting that DZ Hyp priced a €1bn eight year at minus 3bp just two weeks ago, on 23 April.

“I would not have expected a 5bp move from start to finish,” said another banker away from the leads. “In a couple of our recent trades investors have clearly indicated that they didn’t like this, but according to the updates, BayernLB didn’t lose a single penny.”

The pricing is the tightest on any euro benchmark covered bond this year.

The syndicate banker suggested recently higher yields are supporting demand.

Nationwide Building Society is expected to approach the market with a 20 year covered bond tomorrow, after a mandate announcement today, and another syndicate banker noted that, with the 20 year swap rate at 0.46% this afternoon, the UK trade should offer a coupon of 0.5%. ABN Amro, BNP Paribas, NatWest and UBS are leads for the €500m (£435m) no-grow trade.

Nationwide’s deal will be the first euro benchmark from the UK this year, with the last having been a €500m seven year for Yorkshire Building Society in October 2020. The new issue will also be the longest UK euro benchmark in at least a decade – Nationwide has previously been the longest-dated UK issuer in euros, with 15 year issuance, most recently in June 2017.

A covered bond banker said he was surprised to see Nationwide approach the euro covered bond market after it in September 2020 bought back some £2bn of covered bonds in euro and sterling.

Another noted that, largely as a result of this activity, Nationwide’s euro covered bonds trade at squeezed levels, with its 2032 paper quoted at 5bp over mid-swaps, versus shorter dated, 2027 Santander UK paper issued in January 2020 quoted at 8bp over.

“Banks including Nationwide in the UK can access pure funding from the central banks,” he added, “so with curves so flat, it makes sense for most issuers to go long, and they can price at extremely competitive spreads.”

MünchenerHyp is tomorrow set to hit the very long end of the curve for the fourth time since September 2020, having mandated Barclays, BayernLB, Commerzbank, DZ and NordLB for a €500m no-grow 15 year mortgage Pfandbrief.

The German issuer launched a 15 year last September, a 20 year in November, and then a short 19 year in January, all for €500m. According to pre-announcement comparables circulated by the leads, its September 2035s were at minus 3.5bp, mid, its April 2039s at minus 2.5, and its October 2039s and November 2040s at minus 2bp.

A €250m 10 year mortgage Pfandbrief for Natixis Pfandbriefbank is also awaited, following pre-marketing.