Covered bonds hit the ground running today (Tuesday), with Erste launching a €1.5bn dual-trancher including a blow-out 6.5 year tranche, while Aareal sold a €750m eight year, and Bawag and Commerzbank are set to tap into the strong conditions tomorrow ahead of heavier supply next week.

The last euro benchmark before the seasonal break was a €1.75bn six year for Bank of Nova Scotia on 8 December that, at €1.75bn, was the biggest single-tranche deal of 2021, and the strong demand in evidence then was again seen today.

“It’s almost like we are just picking up from where we left off last year,” said a syndicate banker. “The last trade of the year saw so much demand for a trade that late into the year, and this is just the same – every investor is willing, able and ready to buy covered bonds.”

Erste Bank’s €1.5bn 6.5 and 15 year transaction attracted a peak €4.4bn of orders, allowing it to price the shorter tranche at a negative new issue premium, while Aareal – which also hit the market on the opening day of 2021 – drew some €1.5bn of demand to its €750m Pfandbrief.

“While each had a bit of its own colour, they definitely illustrate that this is a receptive market, and that we are basically continuing where we finished off end of last year,” said a syndicate banker involved in both of the deals. “All those who are monitoring the market will realise how well these have been going today, and it will encourage those who feel like moving quickly.”

January had been flagged as a heavy month for supply, and bankers reiterated this expectation today, both for covered bonds and the wider FIG market. A further two covered bond issuers are expected to hit the market tomorrow (Wednesday) ahead of public holidays in some parts of Europe on Thursday.

Bawag is due with a €500m no-grow 10 year mortgage covered bond via BayernLB, Deutsche, DZ, Erste and RBI, while Commerzbank is planning a 10 year euro benchmark Hypothekenpfandbrief via BayernLB, Commerzbank, DZ, Santander and UniCredit, according to mandate announcements today.

“I presume we’ll have a typical January,” said the syndicate banker, “to the extent that it’s very active for the 10 to 15 business days before issuers move into blackout. People will count their blessings and it will just carry on – all subject, of course, to macro influences.”

Other syndicate bankers were equally bullish on supply and the reception deals can expect to enjoy, citing attractive relative value, ongoing central bank support, and high redemptions.

“Investors are cash rich and they want to put money to work,” said one.

“I think the next week will be very, very heavy,” he added. “We will be seeing a lot coming in the next two or three weeks, maybe even up to 20 deals, before the first wave is over.”

Erste Group Bank launched its new issue today after coming out first with its mandate announcement yesterday (Monday), when most of continental Europe was open but the UK had a public holiday.

Leads Crédit Agricole, Commerzbank, Danske, DekaBank, DZ, Erste, Helaba, ING, LBBW and UniCredit opened books this morning for its 6.5 year and 15 year, dual-tranche euro benchmark mortgage Pfandbrief, expected rating Aaa. Initial guidance for the shorter tranche was the mid-swaps plus 3bp area, and for the longer tranche the plus 9bp area. After around an hour and 20 minutes, the leads reported combined books of €3bn, with demand skewed to the shorter tranche. After around two hours and 25 minutes, guidance was revised to mid-swaps minus 2bp+/-1bp, will price in range, for the 6.5 year on the back of books of €3bn, including €215m in JLM interest, while guidance was revised to plus 6bp+/-1bp, WPIR, on the back of books of €1.4bn, including €85m JLM interest. The size of both issues was set at €750m. The spread for the shorter tranche was ultimately fixed at minus 3bp, and for the longer tranche plus 5bp, on the back of books of €2.8bn, JLM unchanged, and €1.5bn, JLM unchanged, pre-reconciliation, respectively.

A lead banker noted that Austrian issuers typically favour long-dated issuance, and that the dual-tranche format including the 6.5 year tranche enabled Erste to achieve its target of taking out a large amount.

“The 6.5 year was obviously the most popular and could be priced quite aggressively,” he added. “The 15 year was also very solid.”

Lead syndicate bankers saw fair value for the 6.5 year at minus 2bp, implying a negative NIP of 1bp. There was less consensus on fair value for the longer tranche, with one putting it at 1bp-2bp, and others in the context of 3bp-4bp, implying more NIP on the table. According to pre-announcement comparables circulated by the leads yesterday, Erste May 2034s were quoted at 0.8bp, mid, while Bawag June 2034s were at 1.3bp and November 2035s at 3.1bp.

“The 6.5 year was truly dynamic,” said another lead banker. “We experienced this sort of effect for five year transactions towards the end of last year.

“On the long tranche, of course, you need to pay up a bit.”

Following a mandate announcement yesterday, Aareal Bank leads Commerzbank, DZ, LBBW, NordLB, SG and UniCredit went out this morning with initial guidance of the mid-swaps plus 3bp area for the eight year euro benchmark mortgage covered bond, expected rating Aaa. After an hour and a half, they reported books above €1.1bn, including €190m in joint lead manager interest. After two hours and 10 minutes, the issue size was set at €750m, and guidance revised to mid-swaps flat +/-1bp, will price in range, on the back of books above €1.35bn, including €170m in JLM interest. The final spread was set at minus 1bp, on the back of books above €1.5bn, JLM interest unchanged. Final books were €1.477bn, including €130m JLM interest.

The re-offer of minus 1bp compared with fair value of 2bp, according to lead bankers.

“It was not the quickest building process, but at the end of the day, I think a 1bp NIP is a very, very good outcome,” said one.