Westfälische Landschaft Bodenkreditbank drew Eu1.8bn of demand for a Eu500m 10 year mortgage Pfandbrief yesterday (Thursday) despite offering a low yield, while a treasury official at the issuer said the spread was almost 20bp tighter than when it began monitoring the market.

Leads DZ Bank, HSBC, LBBW, UniCredit and WGZ priced WL Bank’s transaction at 26bp over mid-swaps, at the tight end of initial price thoughts of the 30bp over area.

Robert Holl, deputy head of treasury, money and capital markets at WL Bank, told The Covered Bond Report that some investors were deterred by the low yield, of around 2.5%, on the transaction.

“The yields on the long end are too low for some investors,” he said. “But a lot had to invest in a longer term bond even if yields are very low because of the lack of Pfandbrief supply.

“Investors are very happy that we offered an alternative to other euro covered bonds,” he added.

A syndicate official at one of the leads acknowledged the yield was an issue was an issue, but said he had been confident about the deal’s prospects.

“We started taking indications of interest at the 30bp over area because we wanted it to be enticing enough to get bookbuilding going,” he said. “I know there are always people in the market who will say we could have gone tighter but it was not the intention of the issuer to squeeze as many basis points as possible out of the deal.

“You have to remember there hasn’t been a 10 year from Germany for a very long time,” he said. “Last week’s DNB Boligkreditt priced at a yield below 3% – a threshold for investors – the first indication that a low yield transaction could work.”

DNB launched a Eu2bn 10 year on Tuesday of last week (13 March) at 61bp over with a coupon of 2.75%.

Holl said the 10 year maturity fit the maturity profile of WL Bank’s long term new mortgage loans business.

“Issues that have been placed this year have been placed mainly in the medium term, driven by the LTRO,” he noted.

WL Bank last came to the market with a medium maturity, a Eu1bn five year at 11bp over in May 2011.

“Our plan is to bring one to two benchmarks in long term maturities going forward in addition to our existing mixed funding strategy,” said Holl, noting that this 10 year was the bank’s first.

He said the issuer had been watching the market since the beginning of the year.

“Spreads were tightening and tightening very strongly for issuers, particularly in the 10 year maturity,” he said. “WL Bank started looking when the spread was in the mid-40s, and then every week, every month the spread tightened until we thought we have now reached a good level for a long term Pfandbrief.”

Germany/Austria took 68%, France 8%, Asia 7%, the Nordics 7%, Switzerland 5%, the UK 2%, the Benelux 2%, and Italy 1%. Banks were allocated 41%, funds 24%, savings banks 11%, central banks/official institutions 11%, insurance companies 11%, and corporates 2%.