Deutsche Pfandbriefbank (pbb) today achieved the tightest spread on a Sonia-linked covered bond since the new rate came into use in 2018, pricing a £500m (€579m) three year floating rate note at 27bp over and also a relatively low premium to euros.

Following a mandate announcement yesterday, leads Deutsche, HSBC, NatWest and Nomura this morning went out with initial guidance of the 30bp area for the April 2024 sterling benchmark-sized transaction. After around two-and-a-half hours, the leads reported books of around £500m, and after around four-and-a-quarter hours set the pricing at 27bp for a £500m trade on the back of more than £660m of demand, excluding JLM interest.

The pricing is the tightest for a Sonia-linked covered bond since Lloyds issued a £1bn three year at 37bp in January 2020.

Pbb’s deal is only the second sterling benchmark this year, following a £1bn 10 year from Nationwide Building Society in February.

“With the lack of supply and overall strength of the market, we have seen spreads coming in nicely,” said a syndicate banker at one of the leads, “so this was the first sub-30bp print.

“In sterling, like in dollars, there are not the same dynamics in terms of oversubscription as in euros,” he added, “but the spread move is similar and investor appetite from more buy and hold accounts make for a very impressive transaction.”

The lead banker said pbb benefited from familiarity among the sterling investor base, having previously tapped the sterling market with covered bonds and also in senior format.

The leads put fair value at around 26bp, with pbb’s last sterling trade – also a £500m three year, in October – quoted at around 24bp-25bp, mid, pre-announcement, and taking into account where UK paper was trading in the three year part of the curve, typically tighter than non-UK names.

The lead banker said the pricing was equivalent to around 4bp over mid-swaps in euros and that fair value for a new pbb three year euro benchmark might be around minus 1bp. The 5bp differential, he noted, is roughly half of the 10bp premium required in sterling last year.

“I’m sure we will see other issuers looking at this,” he added.

Like pbb’s last Sonia-linked FRN, the issue was priced with a high coupon, of Sonia plus 100bp.