An eight year KfW transaction that was doubled in size this (Wednesday) morning was welcomed as a positive sign for the covered bond market, with one banker suggesting it could spur a resumption of benchmark supply, initially via a Pfandbrief issue.

KfW, Germany’s government-owned development bank, priced a Eu2bn eight year issue at 3bp over mid-swaps via Deutsche Bank and HSBC. Covered bond bankers away from the leads said the deal had gone very well, with the size being increased from an initially targeted Eu1bn on the back of high demand. The level was also tightened to 3bp over following initial guidance of the 4bp over area.

A Eu500m minimum 10 year issue from the State of Berlin that was in the market at the time The Covered Bond Report went to press was seen as having been launched to take advantage of the momentum captured by the KfW transaction. A book of more than Eu1bn had been built at guidance of the 25bp over mid-swaps area.

A syndicate official at one of the leads on the State of Berlin transaction – Barclays Capital, DZ Bank, LB Berlin and UniCredit – said that the issue was not a new project, but that it was launched given evidence of demand for zero risk weighted assets.

A covered bond syndicate official away from the two issues described KfW’s as “a great deal”.

“It’s a pretty positive signal going forward,” he said.

Another covered bond banker was hopeful that KfW’s deal could pave the way for a Pfandbrief issuer to tap the benchmark covered bond market.

“It could be a good catalyst,” he said, suggesting that the transaction could be the first of a series of “baby steps” needed to bring back benchmark covered bond supply.

This was being held back by volatility rather than technical factors, which are very supportive of covered bonds, he said. With its “half Bund, half swap behaviour” and roughly similar investor base to Pfandbriefe KfW serves as a good proxy for the latter, he added.

KfW’s transaction in his view helped lower the execution risk and new issue premium that would be involved in bringing to market a benchmark covered bond, adding that Pfandbrief issuers typically were “first out of the blocks” after the traditional summer break.

A DCM banker also had a positive take on KfW’s transaction with respect to its implications for the covered bond market.

“Definitely this is a springboard to bring the covered bond market to life again,” he said. “Pfandbriefe would be a natural candidate after agencies.

“I wouldn’t be surprised to see some taps, which are probably the more efficient way to test the market.”

A syndicate official suggested a core issuer could tap the market as early as next week, though he cautioned this was market-dependent.

“People are slowly coming back from holidays,” he said. “The market is stabilising. Why not issue?”

The DCM banker said that although opportunities to sell new benchmarks exist, more time may be needed before supply can resume.

“The only thing about benchmarks at the moment is that new issue premiums are higher,” he said, “also on the Pfandbrief side.

“Betting on a bit more stability would maybe reduce new issue premiums somewhat.”

He also suggested that market participants will want to wait to see how KfW’s issue fares in the secondary market.

“We’re hearing that it’s good, but we need to see it, too,” he said.

Recent floating rate Pfandbriefe showed that there is some interest in the asset class, but the format was “not really what we want to see for confidence”, he added.