A surge in interest for covered bonds allowed issuers to generate historically high demand and pricing leverage for deals on Wednesday, as ING Bank stood out with the largest trade with a tenor of 10 years or longer in over three years, in spite of the European Central Bank's gradual withdrawal from the primary market. The ECB announced last week that it would phase out its primary market purchases of covered bonds and other private sector bonds by March, focusing on secondary market purchases thereafter. That process has already begun, with the ECB this week placing orders for only around 10% of the deal size of eligible new issues, according to multiple sources, down from its previous typical bid of 20%. However, the market has so far taken the news in its stride, with bankers describing the execution dynamics in the euro covered bond sector as being the strongest for some time. They said a shift in sentiment in recent days has driven previously circumspect investors to pile in to the market, encouraged by strong secondary market performance. "A lot of the more opportunistic buyers entered into 2023 more cautiously and were not looking to build any inventory or go long bonds, in anticipation of big spread widening on the back of the big primary supply we get in January," said a banker. "But, despite the massive supply we had in January, the secondary market has performed remarkably well – almost every bond has performed – and that has helped with sentiment and now all these investors are looking to make up for the lost four weeks." Bankers also cited recent rates moves as having boosted the attractiveness of short and long-dated bonds, amid an inversion of the curve, while in some segments of the market, the repricing seen year-to-date means covereds now look attractive versus the senior preferred bonds of tighter-trading issuers. These shifting dynamics have meant the ECB's withdrawal has so far been of little consequence, said bankers. "So far, so good," said a second banker. "Real money demand has been there to replace [ECB demand], even over-replace it, because the books we're seeing are massive." The most dramatic example on Wednesday was the success of a dual-tranche deal from ING, which included the first euro benchmark covered bond with a tenor of 10 years or longer since January 23. The Dutch bank offered a three-year tranche with initial guidance of mid-swaps plus 4bp area and a 10-year tranche at 23bp area, via BayernLB, Danske Bank, DZ Bank, Erste Group, ING, Natixis, Santander and Scotiabank. Demand in excess of €4.8bn (excluding JLMs) for the three-year allowed ING to price €2bn at minus 2bp, flat to fair value. Orders came in above €3.2bn (excluding JLMs) for the 10-year, the size of which was also set at €2bn as the spread was fixed at 19bp, incorporating around 4bp of new issue concession. The tranche is the largest euro covered bond with a tenor of 10 years or longer since ABN AMRO printed a €2bn 15-year in January 2020 and boasts the largest book for such a transaction since Caffil pulled in €3.25bn-plus demand for a €1.5bn 10-year in January 2021.All the rage Germany's Aareal Bank also provided a stark demonstration of how conditions have improved as it priced a €750m three-year mortgage Pfandbrief at 3bp, flat to fair value, off more than €2.35bn of demand (including €125m JLM interest). Just five weeks ago, on January 4, Aareal priced a €750m long four-year (October 2027) Pfandbrief at 14bp, paying around 6bp of new issue concession, pulling in more than €1bn of orders (including €165m JLM interest). "Aareal in the past has had some struggles and it is quite a frequent issuer, so one could have argued it would not benefit from this rage for bonds, but it did," said the first banker. "No one saw a €2bn-plus book coming." It is not just the scale of demand that has caught the eye but also the pricing leverage issuer
Bellwether