Summer has ended early, with SSA new issue business fully under way well before the end of August. Across core markets, 11 public benchmark deals priced this week. But don’t be fooled by that seemingly healthy early demand.
Indeed, the quick restart in the primary markets seems to have caught some investors off guard and issuers are finding it difficult to manage the volatility still bedevilling secondary markets, while judging the appetite for duration.
Finland was the first sovereign back in the euro market after the summer with its third syndication, although KfW snuck in one day ahead to print a new long five year, catching the market by surprise.
While the German policy bank took €4bn from its long five year sale, sources said it wasn’t quite the strong reception markets are used to for the borrower, with the deal being less than two times covered.
KfW paid slightly more concession than usual. It has coughed up an average 2.04bp new issue premium for its euro benchmarks this year, according to GlobalCapital data, while consensus among bankers on and away from this deal was 3bp. While respectable, the €7.3bn final order book was also well shy of its 4.4 times average coverage.
Some sources also noted a degree of investor fatigue for five year paper, a popular maturity for borrowers following the dramatic bond sell-off in the first three weeks of August, when the idea of a strong economy keeping rates higher for longer took hold.
But disappointing PMI numbers meant demand for longer-dated bonds from triple-A names gathered pace again as investors once more pivoted, hoping for rate cuts.
And this is not an easy market to access. Lead bankers on the deals that followed KfW’s said they subsequently adjusted initial pricing, albeit marginally, to err on the side of caution.
A cautious investor base was not the only concern for the market this week. Wednesday’s deals faced a 10bp rally in European rates driven by those downside surprises in flash PMIs on Wednesday that indicated the economy had slowed in August.
It is just as well that the public sector is now well versed in navigating rates volatility, listening to investor feedback and navigating windows. This is exemplified by its resilience amid an intensely volatile year.
Now is not the time to make mistakes that could hurt pricing on deals for the rest of 2023. SSAs should keep their wits about them when jumping back in after summer — particularly those who are not as far through their funding programmes.
