DZ Hyp offered encouragement to the euro covered bond market with a stronger-than-expected €500m no-grow six-and-a-half year public sector Pfandbrief on Tuesday, while the week’s four deals all traded well to suggest the underperformance of the asset class could be turning.

Four deals totalling €2.25bn were launched between Monday and Wednesday, ahead of the latest European Central Bank rate cut decision yesterday (Thursday), hitting the market after signs of stability in spreads last week following widening since the summer break, and performing well in the aftermarket.

While covered bond bankers said the market is still not as strong as it has been at times this year, the new issuance and notably DZ Hyp’s transaction offered encouraging signs, with the longer-dated German issue the “trade of the week”, in the words of one.

“It’s a vanilla name that everyone can take,” said the syndicate banker away from the leads. “so it’s then just a question of, where exactly can you clear Pfandbriefe in six-and-a-half/seven years? It was a €500m no-grow, but it clearly exceeded expectations – they tightened 6bp and I’m sure that wasn’t the base case, ending up with around 1bp of new issue premium, which is very strong and the bonds are performing well.

“Everybody now knows better where things should be trading and seeing a peak book of close to €2bn for DZ Hyp tells us that maybe we are at a high for covered bonds and hopefully can tighten a bit from here.”

After a mandate announcement on Monday, leads ABN Amro, Barclays, DZ, LBBW, Natixis and UniCredit opened books on Tuesday morning with initial guidance of the 37bp area for the €500m no-grow April 2031 public sector Pfandbrief, expected ratings Aaa/AAA (Moody’s/S&P). After around 45 minutes, they reported books above €1bn, excluding joint lead manager interest, and after close to two hours guidance was revised to 32bp+/-1bp, will price in range, on the back of books above €1.95bn, including €70m of JLM interest. The deal was then priced at 31bp with the final book €1.35bn, including the €70m of JLM interest and with 67 accounts allocated.

“DZ Hyp has continued its successful issuing activity in 2024 with this public Pfandbrief issue,” said Sabine Barthauer, DZ Hyp CEO. “The strong demand that it generates in such a challenging market environment is testament to this bank’s placement power, both in Germany and in Europe.

“We would like to thank all investors for the trust they have placed in us.”

A lead banker highlighted the 6bp tightening as one element of the transaction that reflected its success and the positive market signalling.

“We haven’t seen this for some time,” said a syndicate banker at one of the leads. “Of course, not everybody liked it, but at the same time, I had the impression even those who did not like it did not disagree with doing it.

“It was on the table and if you have a book of €2bn for a €500m no-grow you can easily stand the disappearance of €500m-plus or whatever we lost on this occasion without harming the deal in any meaningful way.”

Bankers put the new issue premium at 1bp to 2bp, although arguably as low as zero, with DZ Hyp’s outstanding not offering a completely clear picture: its €750m February 2031s, for example, were at 30bp, and its €600m May 2032s at 29bp. Meanwhile, Berlin Hyp August 2031s were at 29bp, MünchenerHyp July 2031s at 25bp, and LBBW September 2031s at 27bp.

“€500m at 31bp sends a very nice signal that those six years and beyond maturities are working,” said the lead banker, “in particular for well established names like DZ Hyp.

“I still believe maturities from the three to seven year bucket will be picked,” he added. “Longer than sevens doesn’t make a lot of sense at the moment with investors, given that versus SSAs in particular, longer dated covereds are just far too expensive.”

Other issuance this week focused on shorter maturities, with Kookmin Bank and NordLB on Monday selling January 2028 and July 2028 €500m issues, respectively, and Argenta Spaarbank issuing a €750m three year on Wednesday.

“Three years is the flavour of the month,” said a syndicate banker away from the issuance, noting that the issuers also ensured success with ESG features, the German and Belgian names selling green bonds and the South Korean a sustainability issue.

The ECB meeting, with its 25bp cut, is not expected to have an impact on subsequent issuance.

“The 25bp were factored in,” said one banker. “Zero or 50bp would have been a surprise.”

Supply expectations are meanwhile modest.

“I’m not expecting a wall of supply,” said a syndicate banker. “Many issuers, particularly in Europe, knew that the back-end of the year was going to be a challenge because of the US election and so are well advanced in their funding programmes.

“So we’re now into the territory whereby people are looking at pre-funding rather than rounding out their funding, and therefore they can be very opportunistic.”

Blackouts are also playing a part, with European banks reporting third quarter results across the coming weeks.