KfW may have a large funding target, but it also knows what to do with it. When the borrower on Tuesday announced that it was set to price a €2bn seven year benchmark at a level in line with initial price thoughts and guidance — and with orders over €2bn including an unspecified amount of joint lead manager interest — the honk of hound wafted over Europe’s capital markets.
The issuer paid a decent new issue premium — bankers away from the deal called it about 8bp. But that wasn’t enough to tempt in enough investors to get a benchmark away of the magnitude that would usually qualify as one from this borrower: €3bn-€5bn.
No doubt many investors have been put off by extreme volatility in European government bonds over the last six weeks. Some investors bought Bunds at 7bp yield and have watched their yields balloon to over 100bp in a matter of weeks. That is hardly going to encourage investors to pile into what is normally considered one of the safest names in the market.
KfW and EIB haven’t printed in proper benchmark size in euros since the European Central Bank unveiled its public sector purchase programme in March. That should have market participants seriously worried.
These borrowers have size to raise. But markets will soon shut down for the summer break and it looks like the euro market could be as difficult in September as it was in June. The autumn could come just as dollars are hit with volatility around a key Federal Open Market Committee meeting when investors will be looking for a hint on the size and timing of rate rises.
The autumn could turn into a painful time for funding officials. New issue premiums may be about to rocket.