A double-digit spread and 0.5%-plus yield helped Nationwide attract more than €2.3bn of orders to a €500m 20 year covered bond today (Tuesday), allowing the first UK euro benchmark of the year to be priced clearly inside fair value estimates, while MüHyp flexed its muscles in a €500m 15 year trade.

Following Nationwide Building Society’s mandate announcement yesterday (Monday), leads ABN Amro, BNP Paribas, NatWest and UBS this morning went out with initial guidance of the mid-swaps plus 15bp area for the €500m (£435m) no-grow May 2041 issue, rated AAA/AAA. After around 40 minutes they reported books above €1.25bn, then after around an hour and 45 minutes set the spread at 10bp on the back of more than €1.8bn of demand, excluding joint lead manager interest. The final order book exceeded €2.3bn, excluding JLM interest.

Although every recent euro benchmark has gone well in terms of both pricing and demand, syndicate bankers away from the leads said Nationwide’s outcome still represented a step up from the positive trend, with its “fantastic” outcome.

“The biggest surprise was Nationwide clearing its 20 year at 10bp,” said one, “which is through their fair value curve. We have basically seen nothing from the UK beyond seven years since Brexit, and whether or not investors wanted UK risk was unclear.”

However, other bankers away from the leads suggested the omens had been encouraging for the trade.

“In general, we hear a lot of investors looking for UK names,” said one. “With Nationwide, they get exposure to a solid high street name and a strong regulatory framework. OK, there may be some question marks around the housing market, but the cover pools are extremely solid.

“And if you say, plus 10bp, investors say, I’ll have it. Where else can you get a spread like that?”

He suggested pension funds and insurance companies in particular will have been seeking large tickets.

The euro benchmark is the first non-sterling benchmark covered bond from the UK since the end of the Brexit transition period at the turn of the year, and the first UK euro benchmark since Yorkshire Building Society sold a €500m seven year in October 2020.

A syndicate banker at one of the leads said Nationwide’s success is symptomatic of the state of the covered bond market, with the supply/demand imbalance and the hunt for yield and spread.

“Nationwide is a very well known and well liked issuer, with a broad European following, so we had no concerns about the ability for it to issue a 20 year or investors’ capacity to add UK risk there,” he added. “There was a lot of pent-up demand from investors starved of UK and Nationwide supply.

“And the yield is higher than anything else available.”

The deal was priced with a 0.5% coupon and 0.572% yield.

The new issue is the longest UK euro benchmark, and this, as well as the recent lack of UK supply, complicated fair value calculations. However, syndicate bankers generally put fair value in the low teens, between 11bp and 14bp over mid-swaps.

A syndicate banker away from the leads cited two approaches. One was looking at Nationwide 2029s (its longest dated outstanding) at 5bp and building up a curve, with a 10 year seen at 8bp or 9bp over, and the curve to 20 years adding 3bp-4bp, putting fair value at around 12bp.

“You can also look at the Canadians,” he added, “with a lot of investors seeing the UK at 5bp over them.”

Based on RBC 2031s at 5.5bp, fair value for a UK 10 year would then be around 10bp, with the curve then taking fair value for a 20 year to around 13bp.

The lead banker said the leads discussed two approaches with investors. Firstly, taking UK paper in the belly of the curve and building out the curve to 20 years, or secondly, looking at CBPP3-eligible 20 year issuance, trading at flat to 1bp over, and then adding a premium for UK risk, with both methods implying a level of 11bp-13bp over.

“Investors were comfortable with that range,” he said. “But in the execution process investors were as unsure about where to pinpoint fair value as ourselves, and the level of demand helped us price quite aggressively.

“You can argue the pricing is well through fair value,” he added, “although arguably it’s an academic exercise – we’ll see where it settles down.”

He noted that it was important to look at where generic UK paper was trading rather than just Nationwide’s curve, given that its oustandings have been squeezed since a buyback of some €2.2bn-equivalent of covered bonds in September.

He suggested that the buyback had given scope for the issuer to approach the market and – rather than meeting any particular funding need – term out its debt and lock in the low levels available in the market

“Generally, the UK banks have little need to come to the market,” he added. “I’d be very surprised to see a follow-on trade.”

MünchenerHyp also entered the market today after a mandate announcement yesterday, with leads Barclays, BayernLB, Commerzbank, DZ and NordLB this morning going out with initial guidance of the mid-swaps plus 2bp area for the €500m no-grow May 2036 mortgage Pfandbrief, rated Aaa. After an hour and 10 minutes, they reported books above €1.1bn, including €215m JLM interest, and then after close to two hours revised guidance to minus 2bp+/-1bp, will price in range, on the back of books above €1.4bn, including €215m JLM interest. The spread was subsequently fixed at minus 3bp on the back of more than €1.35bn of orders, including €215m JLM interest, and the final order book was €1.1bn, including €215m JLM interest.

Syndicate bankers away from the leads said the strong outcome came as no surprise for the top German name.

“It’s a great result, with a good order book,” said one. “Their 35s were at around minus 4bp and their 40s around minus 2.5bp, so this was bang on fair value at minus 3bp.

“They’ve done a few long dated issues in the past and are a very loved credit among domestic buyers in particular.”

He suggested that execution – as with recent sub-Libor prints – was eased by the prevailing higher yield levels, which have made investors less reluctant to accept negative spreads. The deal was also priced with a 0.25% coupon and 0.325% yield.

A lead banker said that although some investors continue to resist final pricing moves the “super-lopsided” market dynamics mean most have little choice but to participate.

“Issuers are in an extremely comfortable position,” he added.

Today’s successful euro benchmarks come after an impressive €500m 10 year from BayernLB yesterday that was priced 1bp inside fair value on the back of a €2.2bn final book, and syndicate bankers said further supply should hit the market this week.

Natixis Pfandbriefbank is still awaited with a €250m 10 year mortgage Pfandbrief via Natixis, NordLB and UniCredit.