Commerzbank got the euro benchmark covered bond market off to a “solid” start for 2019 today (Monday), pricing EUR750m five and 15 year Pfandbriefe on the back of EUR1.7bn of orders – including a modest Eurosystem ticket – at NIPs of some 7bp. LBBW is expected tomorrow in seven years.

Commerzbank had announced the mandate for the transaction on Friday, 21 December, with Landesbank Baden-Württemberg (LBBW) shortly afterwards announcing that it had mandated a seven year mortgage Pfandbrief for launch early in the new year via Crédit Agricole, Erste, ING, LBBW, Natixis and Nordea.

Commerzbank then opened books for the dual-tranche mortgage Pfandbrief at around 9.10 CET this morning, with leads Commerzbank, Credit Suisse, LBBW, SG and UniCredit going out with guidance of mid-swaps plus the 7bp area for the five year euro benchmark and the 20bp area for the 15 year.

A syndicate banker at one of the leads put fair value for the five year at minus 1bp and the 15 year at 12bp, with bankers away from the leads within 1bp of these.

At the first update after an hour and a quarter orders were around a combined EUR1bn and at the second update at around 11.45 the books passed EUR1.4bn, with demand skewed towards the 15 year, and the five year was set at 6bp and the longer tranche at 19bp. Demand had reached some EUR1.7bn at the final update at 12.50, with demand skewed towards the five year.

A syndicate banker away from the leads said he had expected interest in the five year to be more price sensitive and hence for renewed demand to come in once the pricing was set, and the lead syndicate banker echoed this, noting that interest in the 15 year from the likes of insurance companies was more focused on the absolute yield level and less spread-sensitive.

He said that while some investors remained on the sidelines in light of an uncertain market backdrop, the result was “very solid”.

“It took some time and work to let the book develop,” he said, “but when the spreads were set we had a further round of momentum. Could we have hoped for pricing 1bp tighter? I don’t think these are the circumstances for trying to squeeze an extra basis point.”

A banker away from the leads said that the pricing appeared to have been set on the attractive side with a view to prioritising size over price.

“I suspect that was maybe the reason for coming so early,” he said, “to scoop as much of the liquidity as possible.”

The new issue premiums of around 7bp are slightly higher than the premiums paid late in 2018.

Although net increases to the European Central Bank’s Asset Purchase Programme (APP) including CBPP3 have ceased, maturities are being reinvested and market participants had wondered whether the Eurosystem would remain active in the primary as well as the secondary market. According to a lead syndicate banker, the Eurosystem was involved in Commerzbank’s issue, although he said that it was to a lesser extent than in the final quarter of 2018, when orders were placed for 10% of deals’ initial sizes. He added that it was not clear to him from the order whether the ticket size was based on a certain percentage or proportionate to a certain deal size.

Bankers away from the leads said Commerzbank’s deal had gone decently, taking into account the short post-holiday week, with some market participants still away, and the difficult market backdrop.

“Everybody hoped for a different start to the year,” said one, “but we started in red mode.”

Unlike covered bonds, the senior financial, corporate and SSA sectors of the euro market remained shut this morning.

Bankers expects further covered bond supply soon – market conditions-permitting.

“It’s crystal clear to everyone that it’s going to be busy,” said one. “There are a lot of projects out there for later this week or early next.”

He said that although credit indices were wider, cash bond spreads were holding up, even if a widening trend is expected to continue in covered bonds.

Another banker said he expects new issue premiums to remain attractive, with issuers and lead managers acting cautiously – “i.e. cheaply”.

“The pressure on spreads is set to prevail for the foreseeable future, with nothing in favour of tightening in the short term,” he added.

“My advice to issuers would be to spend a basis point or two if you want to get something done – although that will then mean widening expectations are somewhat self-fulfilling.”

LBBW is expected to launch its seven year mortgage Pfandbrief tomorrow, after having announced its mandate shortly after Commerzbank and having been a joint bookrunner on today’s deal.

LBBW January 2024s were quoted at minus 5bp, mid, on an i-spread basis today, according to comparables circulated by the leads, and its February 2025s at minus 2.5bp. Other comparables included Helaba September 2025s and January 2027s at minus 0.5bp, DZ Hyp November 2025s and February 2026s at mid-swaps flat, and Commerzbank March 2025s and June 2026s at 1bp and 2bp over, respectively. A lead banker noted that Commerzbank’s issuance today would also inform the pricing.