The German city of Bremen brought out the first new 10 year Länder bond for more than a month on Wednesday.
The €500m 2.875% March 2034 sold at a spread of 19bp over mid-swaps, flat to guidance. It offered a pick-up of 46.3bp over the 2.2% February 2034 Bund.
The no-grow deal took in a €600m final order book, including €110m of interest from lead managers Helaba, JP Morgan, Nord/LB, Rabobank and UniCredit.
Currently, German Länder are receiving tight valuations compared to agency peers, such as KfW, which is causing many issuers to shy away from the oversupplied 10 year sector.
The last new 10 year line from a Länder was opened by Land Berlin in mid-February. Other issuers, including Berlin itself, Hessen, Saxony, Lower Saxony and North Rhine-Westphalia, have issued in other parts of the curve, such as the four, six, seven, eight, 15 and 30 year areas.
“Compared to German agencies, the federal states are still expensive, even if they’re showing more spread compared to the start of the year,” said a lead manager on Bremen’s deal. “Bremen is one of the weaker states, but it’s still a triple-A credit. Fair value is in the context of the high teens. And usually, these deals don’t come with a lot of new issue premium.”
'It is what it is'
Most 10 year Länder bonds that sold in early 2024 offered just 15bp over mid-swaps with little to no pick-up compared to where KfW was trading in the secondary market.
The most recent 10 year Länder, Berlin’s €1bn 2.875% February 2034s, were quoted at an I-spread of 18bp on Wednesday, according to Tradeweb data. Ten year paper from Hessen and Saxony-Anhalt was trading at around 17bp, from Lower Saxony at 18bp, and and older June 2033s from NRW were tighter at around 16bp, while KfW’s €3bn 2034s from January were trading at 15.5bp.
But a banker off the Bremen deal said that there should be some credit differentiation, even within the Länder sector. “Not all Bundesländer are the same, and let’s not forget that Bremen is a small city,” he said.
“It is a subscribed deal and the issuer now has the money they wanted, so I have nothing against it,” he added. “They started and finished at 19bp, which sometimes happens with the German states — it’s a 50/50 chance whether they get to tighten or not, and it is what it is.”
The banker said he is not aware of any requests-for-proposals from German states floating around as Easter approaches, but he expects Länder supply will stay generally steady, at one or two deals per week.
