Banco Santander is today (Wednesday) reopening the benchmark cédulas market with the first such issue in just over eight months after having been swamped with demand from over 300 investors for a Eu2bn three year deal launched this morning.

The deal comes after the Spanish bank yesterday (Tuesday) released its results for the fourth quarter of 2011 and after another peripheral issuer, Italy’s Intesa Sanpaolo, yesterday sold a Eu1.5bn 18 month senior unsecured issue.

A syndicate official said that Intesa’s deal showed that the market to be open to peripheral issuers. Austria’s Erste Bank Group was also in the benchmark covered bond market today, with an investor saying that more Norwegian issuers are also interested in tapping the market after a Sparebanken Vest issue yesterday.

Leads Barclays Capital, Citigroup, Natixis and Santander will price a Eu2bn three year issue for Santander at 210bp over mid-swaps, which follows a tightening of initial guidance of the 230bp over area to the 220bp over area. More than Eu7bn of orders were placed for the deal, with over 300 accounts participating, according to a syndicate official at one of the leads.

Santander was last in the benchmark market with a Eu1bn five year at 195bp over on 31 May 2011, which was also the last benchmark covered bond from a Spanish issuer.

A syndicate official away from the leads was encouraged by Santander’s transaction, describing it as a great deal. He said that the issuer was tapping into a structural short at the short end of the market, suggesting that there are two main comments to make in relation to Santander’s deal. One is “a question of how expensive funding is”, he said, comparing the availability of three year funding at 1% via the ECB versus a 3.30% level that Santander is paying for three year cédulas funding.

His other main comment was to welcome Santander’s deal as a positive sign for the cédulas and the Spanish market in general, saying that it was important for an issuer like Santander to make such a move and that it proved that Spanish banks have access and that access is merely a function of price.

A syndicate official away from the leads put the new issue premium at around 30bp, and the spread over Spanish government bonds at around 55bp.

“I think the pricing is fair,” he said. “I would have started at 230bp over.”

Another syndicate official away from the leads said it was hard to pin down a new issue premium because of a lack of trading in cédulas, but put the spread over Bonos at around 70bp.

“The pricing is not so easy to come to, because you never know how to price something after such a long absence,” he said, adding that the pick-up of 70bp over Bonos should be enough.

“You also have the ECB covered bond purchase programme in place helping,” the syndicate official added.

The trade is only the second this year to offer a three year maturity, something he said would work to the issuer’s advantage.

A portfolio manager said that a deal in the three year maturity is attractive for bank treasuries given the opportunity to carry over cheap funding obtained via the ECB’s three year long term repo operation (LTRO) and invest it into a higher yielding and “risk-free” – barring a break-up of the euro-zone – three year Santander issue. A syndicate official said that this would apply in particular to domestic accounts.

A scarcity of paper with a three year maturity also contributed to high demand and a lack of price sensitivity, said the portfolio manager.

Santander’s issue comes after a strong rally in covered bond spreads, with the portfolio manager saying that Spanish government bonds have also tightened markedly, with January 2015 Bonos at around 150bp this morning.

According to Natixis analysts peripheral covered bond spreads having sharply tightened since the beginning of the year, in particular in the short end of the curve for maturities up to three to four years.

“Therefore, Spanish cédulas hipotecarias, Italian OBGs and Portuguese covered bonds have respectively tightened by around 80bp, 90bp and 140-180bp versus swaps for maturities of around two years,” they said. “This bull steepening trend has been driven by the huge rally on the govvies side.”

However, the portfolio manager added that Santander’s transaction was chaotic, and that he understood that it had come as a surprise, even for the lead managers. Other market participants said the trade was long-awaited, with one citing Santander’s Q4 results release yesterday and Intesa’s deal. Banco Bilbao Vizcaya Argentaria is due to announce its Q4 2011 results tomorrow (Thursday).

Intesa’s deal was priced at 295bp over, the tight end of guidance of the 300bp over area, on the back of more than Eu2bn of orders.